Kosco Corporation produces a single product.The company's absorption costing income statement for March follows: During March,the company's variable production costs were $8 per unit and its fixed manufacturing overhead totaled $5,000. Net operating income under variable costing for March would be:
A)$7,200
B)$7,000
C)$7,600
D)$6,800

Question

Kosco Corporation produces a single product.The company's absorption costing income statement for March follows:  During March,the company's variable production costs were $8 per unit and its fixed manufacturing overhead totaled $5,000. Net operating income under variable costing for March would be:
A)$7,200 
B)$7,000 
C)$7,600 
D)$6,800

Quizplus · Accepted Answer

Under variable costing, fixed manufacturing overhead costs are treated as period costs and are not included in the cost of the product. Therefore, the net operating income under variable costing can be calculated by subtracting only the variable production costs from the sales revenue.

Variable production cost per unit = $8
Units sold in March = 2,200
Variable production costs for March = $8 × 2,200 = $17,600
Sales revenue for March = $30 × 2,200 = $66,000
Net operating income under variable costing = $66,000 − $17,600 = $48,400

However, fixed manufacturing overhead costs of $5,000 still need to be considered. Since these costs are period costs and not product costs, they should be deducted from the net operating income under absorption costing.

Net operating income under absorption costing = $48,400 − $5,000 = $43,400

The difference between the net operating income under variable costing and absorption costing is due to the treatment of fixed manufacturing overhead costs. In variable costing, these costs are treated as period costs and are expensed in the period incurred. In absorption costing, these costs are allocated to the product and are included in the cost of goods sold.

Kosco Corporation Produces a Single Product