This is the total fixed costs, both manufacturing and nonmanufacturing, multiplied by the amount of decrease in inventory. Nonmanufacturing fixed costs are expensed as they are incurred under both variable and absorption costing, so they could not have accounted for any part of the difference in net income.
Mill sold more units than it manufactured during the recently concluded calendar year. Therefore, Mill’s inventory went down during the year from 6,000 units on Jan. 1 to 5,200 units on December 31. Total fixed manufacturing cost in inventory on Jan. 1 was 6,000 × $3 = $18,000. Total fixed manufacturing cost in inventory on Dec. 31 was 5,200 × $3, or $15,600. The difference between $18,000 and $15,600, which is $2,400, was transferred to cost of goods sold as an expense under absorption costing. Under variable costing, though, that $2,400 would have been expensed during the previous year as fixed costs for that year, and thus it would not have been on the recently concluded year’s income statement. Therefore, fixed manufacturing costs on the absorption costing income statement would be $2,400 higher than on the variable income statement. As a result, net income under absorption costing would be $2,400 lower than it would be under variable costing.
This is the total fixed costs, both manufacturing and nonmanufacturing, multiplied by the amount of decrease in inventory. Nonmanufacturing fixed costs are expensed as they are incurred under both variable and absorption costing, so they could not have accounted for any part of the difference in net income.
This is the fixed manufacturing cost per unit multiplied by the number of units by which inventory decreased during the year. However, the effect of the inventory decrease on net income under absorption costing is to decrease net income, not increase it, as compared with variable costing. See the correct answer for a full explanation.
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