Answer:
<u>Absorption income 114, 610 127,500 127,320 </u>
Explanation:
Year 1 Year 2 Year 3
Beginning finished
Goods inventory (units) 0 1,550 1,050
Ending finished
Goods inventory (units) 1,550 1,050 1,150
Change in Inventory 1550 500 100
Fixed manufacturing
<u> Overhead per unit $ 3.80 $ 3.80 $ 3.80 </u>
<u>Absorption Income Less</u>
<u>Variable Income $ 5890 ($ 1900) $ 380</u>
Variable costing income $ 120,500 $ 125,600 $ 127,700
<u> Difference $ 5890 ( $ 1900 ) $ 380</u>
<u>Absorption income 114, 610 127,500 127,320 </u>
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When inventory increases or decreases income differs under absorption and variable costing and is calculated by the following formula
Difference in fixed expense overhead expensed under absorption and variable costing = Change in inventory units * Predetermined overhead rate
When the inventory units increase the fixed manufacturing overhead cost is released from inventory and deducted from variable income.
Similarly when the inventory units decrease the the fixed manufacturing overhead cost is deferred from inventory and added to variable income.
