Outback Ltd manufactures tactical LED flashlights in Melbourne Australia The
Outback, Ltd., manufactures tactical LED flashlights in Melbourne, Australia. The firm uses an absorption-costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding planned and actual operations for 20x4 follow:

The budgeted per-unit cost figures were based on the company producing and selling 140,000 units in 20x4. Outback uses a predetermined overhead rate for applying manufacturing overhead to its product. A total manufacturing overhead rate of $4.50 per unit was employed for absorption costing purposes in 20x4. Any overapplied or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the year. The 20x4 beginning finished-goods inventory for absorption costing purposes was valued at the 20x3 budgeted unit manufacturing cost, which was the same as the 20x4 budgeted unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price for 20x4 was $35 per unit.

Was Outback’s 20x4 operating income higher under absorption costing or variable costing? Why? Compute the following amounts.
1. The value of the 20x4 ending finished-goods inventory under absorption costing.
2. The value of the 20x4 ending finished-goods inventory under variable costing.
3. The difference between Outback’s 20x4 reported operating income calculated under absorption costing and calculated under variable costing.
4. Suppose Outback had introduced a JIT production and inventory management system at the beginning of 20x4.
a. What would likely be different about the scenario as described in the problem?
b. Would reported operating income under variable and absorption costing differ by the magnitude you found in requirement (3)? Explain.
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