Why is the value of inventory for plains irrigation higher

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Reference no: EM132830753

Question - Plains Irrigation uses absorption costing for its external reports and variable costing for its internal reports. Data concerning inventories appear here:

Valuation Basis September October November

Absorption cost $1,346 $2,598 $2,136

Variable cost $854 $1,647 $1,329

Required -

(a) Why is the value of inventory for Plains Irrigation higher when absorption costing is used than when variable costing is used? Is this result always the case? Why?

(b) What is the relationship between absorption costing and variable costing operating income in October? (State which valuation basis will yield the higher operating income and by how much the two operating incomes will differ.)

Reference no: EM132830753

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