As Jacob walked back to his office after the weekly financial meeting, he reviewed his notes and saw that he had written down two operating income numbers: $110,000 and $50,000. He knew that the difference in the numbers was due to using different costing methods, but he had forgotten to write down which was based on variable costing and which was based on absorption costing.

a. Jacob remembered that inventory has been increasing. Which of the operating income numbers results from variable costing and which results from absorption costing?
b. If all other operations remain the same but sales exceeds production next week, what will be the relation between the operating incomes calculated based on variable and absorption costing?
c. For decision-making purposes, does it make sense to report incomes generated by both costing systems at the weekly financial meeting? Explain your reasoning.

  • CreatedFebruary 21, 2014
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