Radial Fuel Cells experienced the following costs in 2017 (Assume the same unit costs in all years): $$\begin{array} { l r }
\text { Direct materials } & \$ 4 \text { per unit } \
\text { Direct labor } & \$ 8 \text { per unit } \
\text { Manufacturing Overhead Costs } & \
\quad \text { Variable } & \$ 2 \text { per unit } \
\quad \text { Fixed } & \$ 150,000 \
\text { Selling \& Administrative Costs } & \
\quad \text { Fixed selling } & \$ 30,000 \
\quad \text { Variable selling } & \$ 1 \text { per unit } \
\text { Fixed administrative } & \$ 20,000
\end{array}$$ During the year, the company manufactured 50,000 units and sold 45,000 units.Beginning inventory is zero.If net income for the year was $265,000 using full costing, what would net income be if the company used variable costing?
A)$250,000
B)$265,000
C)$270,000
D)$450,000

Question

Radial Fuel Cells experienced the following costs in 2017 (Assume the same unit costs in all years): $$\begin{array} { l r } 
\text { Direct materials } & \$ 4 \text { per unit } \
\text { Direct labor } & \$ 8 \text { per unit } \
\text { Manufacturing Overhead Costs } & \
\quad \text { Variable } & \$ 2 \text { per unit } \
\quad \text { Fixed } & \$ 150,000 \
\text { Selling \& Administrative Costs } & \
\quad \text { Fixed selling } & \$ 30,000 \
\quad \text { Variable selling } & \$ 1 \text { per unit } \
\text { Fixed administrative } & \$ 20,000
\end{array}$$ During the year, the company manufactured 50,000 units and sold 45,000 units.Beginning inventory is zero.If net income for the year was $265,000 using full costing, what would net income be if the company used variable costing?
A)$250,000
B)$265,000
C)$270,000
D)$450,000

Quizplus · Accepted Answer

Under variable costing, only variable manufacturing costs are included in product costs. Fixed manufacturing overhead is treated as a period cost and expensed in the year it is incurred. The difference in net income between full costing and variable costing arises from the treatment of fixed manufacturing overhead.Under full costing, fixed manufacturing overhead is allocated to units produced, so some of it is deferred in inventory to the next period if not all units are sold. Since 5,000 units are unsold, $150,000 of fixed manufacturing overhead is allocated to 50,000 units, which is $3 per unit. For the 5,000 unsold units, $15,000 ($3/unit * 5,000 units) of fixed manufacturing overhead is deferred under full costing.Under variable costing, this $15,000 would instead be expensed in the current period. Therefore, to find the net income under variable costing, we subtract this $15,000 from the net income under full costing:$$ \text{Net Income under Variable Costing} = \$265,000 - \$15,000 = \$250,000 $$

Radial Fuel Cells Experienced the Following Costs in 2017 (Assume