Reference no: EM132564212

Question - Company Gamma uses absorption costing for its stock. In 2019, the company had no stock or work in process at the beginning of the year. By the year end of 2019, Company Gamma had the following production, sales, and closing stock:

Year end of 2019 Quantity Cost

Produced 1,000,000 $1,000,000

Sold 800,000 $800,000

Closing stock 200,000 $200,000

The cost of goods comprises of 30% direct manufacturing labour, 30% direct material, and 40% indirect manufacturing costs. These indirect manufacturing costs are 50% fixed indirect manufacturing costs and 50% variable indirect manufacturing costs.

Required -

1. What is the impact on Company Gamma's income statement and inventory if the stock costing changes from absorption costing to variable costing?

2. Which stock costing method should be more appropriate if Company Gamma wants to build-up stock, and why?