I know the answer but im so complicated to understand how to solve this question

Question

I know the answer but im so complicated to understand how to solve this question 20 Two years ago, Louise Wilow started a company to manufacture and sell cell phone accessories. Below are her selected actual operating results for the first two years of operations (her cost structure and selling prices were the same in Year I and Year 2). She allocates her fixed manufacturing overhead costs to the number of units produced in each year. Year 1 45,000 42,000 Units produced Units sold Absorption costing net operating income (NOI) Variable costing NOI Fixed selling& admin. expense 45.000 46,000 ?2 S 63.000S79,000 S 15.000S 15,000 What was the absorption costing net operating income in Year 1? A. $79,000 B. $69,000 C. $77,000 D. $90,000 E. None of the above

Explanation / Answer

Net operating income under absorption costing is higher than the net operating income under variable costing. This difference is because of fixed manufacturing overhead that becomes the part of ending inventory under absorption costing system. The ending inventory absorbs a portion of fixed manufacturing overhead and reduces the burden of the current period. In this way a portion of fixed cost that relates to the current period is transferred to the next period.

Under variable costing, the fixed manufacturing overhead cost is not included in the product cost but charged to the income statement of the relevant period in its entirety. Therefore no portion of fixed cost is absorbed by the ending inventory.

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