Foxtrot reported $65,000 of income for the year by using absorption costing. The company had no beginning inventory, planned and actual production of 20,000 units, and sales of 18,000 units. Standard variable manufacturing costs were $20 per unit, and total budgeted fixed manufacturing overhead was $100,000. If there were no variances, income under variable costing would be:
A) $15,000.
B) $55,000.
C) $65,000.
D) $75,000.
E) $115,000.

Question

Quizplus · Accepted Answer

Under variable costing, only variable costs are included in product costs. Fixed manufacturing overhead is treated as a period cost and expensed in the period incurred. The income under variable costing can be calculated as follows: Sales (18,000 units x $20) = $360,000 - Variable Costs (18,000 units x $20) = $360,000 - $360,000 = $0. Then, subtract the fixed manufacturing overhead of $100,000. The absorption costing income was $65,000, which includes the fixed manufacturing overhead allocated to sold goods. Under variable costing, the fixed manufacturing overhead is not allocated to products but expensed entirely, reducing the income by the amount of fixed overhead not allocated to sold units. Since 2,000 units were not sold, under absorption costing, this would have deferred $10,000 of fixed overhead ($100,000/20,000 units = $5 per unit; $5 x 2,000 units = $10,000). Therefore, the income under variable costing would be $65,000 - $10,000 = $55,000.

Foxtrot Reported $65,000 of Income for the Year by Using