Federal Mixing (FM) is a division of Federal Chemicals, a large diversified chemical company. FM provides mixing
Question:
Net Income
Absorption costing.......... $ 13,800,000
Variable costing........... 12,600,000
Difference............. $ 1,200,000
Overhead is assigned to products using machine hours.
There is no finished goods inventory at FM, only work- in- process (WIP) inventory. As soon as a product is completed, it is shipped to the customer. The beginning inventory based on absorption costing was valued at $ 6.3 million and contained 70,000 machine hours. The ending WIP inventory based on absorption costing was valued at $ 9.9 million and contained 90,000 machine hours.
Required:
Write a short nontechnical note to senior management explaining why variable costing and absorption costing net income amounts differ.
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Related Book For
Accounting for Decision Making and Control
ISBN: 978-0078025747
8th edition
Authors: Jerold Zimmerman
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