Effects Of Opening The Catering Business

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Findings In order to understand the effects of opening the catering business, I looked at variable and absorption costing to figure out which method would be better suited for internal and external reporting in the past and future. In addition, I delved deeper to understand the cost breakdown of the new products which helped form a capital budget that will help us determine the validity of opening the catering business.
Inventory Effect on Net Income For November, there was an ending inventory of 500 units which led to an operating income of $72,357.03 under absorption costing and a $65,679.68 under variable costing . Due to ending inventory absorbing the fixed overhead cost under absorption costing as opposed to being directly expensed under variable costing, there was a smaller per unit fixed overhead expense under abortion which leads to a higher operating income under absorption costing. However, when the ending inventory decreases as seen in December, operating income was greater under variable costing than absorption costing . This is due to the additional expense of fixed overhead under absorption costing because the beginning inventory in December had prior month’s overhead costs. Under variable costing, the ending inventory did not absorb fixed cost, so this allowed the fixed overhead expense to be lower causing operating income to be higher.
Choice of Capacity
After looking at each capacity level, I suggest that the WSBS uses practical capacity for fixed

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