Managerial Accounting (15th Edition)

Published by McGraw-Hill Education
ISBN 10: 007802563X
ISBN 13: 978-0-07802-563-1

Chapter 6 - Variable Costing and Segment Reporting: Tools for Management - Exercises - Page 264: Exercise 6-8

Answer

The company’s inventory level increased during the year.

Work Step by Step

Sales were above the company’s break-even sales and yet the company sustained a loss. The apparent contradiction is explained by the fact that the CVP analysis is based on variable costing, whereas the income reported to shareholders is prepared using absorption costing. Because sales were above the break-even point, the variable costing net operating income would have been positive. However, the absorption costing net operating income was negative. Ordinarily, this would only happen if inventories decreased and fixed manufacturing overhead deferred in inventories was released to the income statement on the absorption costing income statement. This added fixed manufacturing overhead cost resulted in a loss on an absorption costing basis even though the company operated at its break-even point on a variable costing basis.
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