Radial Fuel Cells experienced the following costs in 2014 (Assume the same unit costs in all years): $\begin{array}{lr}
\text { Direct materials }&\$ 4 \text { per unit }\
\text { Direct labor }&\$ 8 \text { per unit }\
\text { Manufacturing Overhead Costs }\
\text { Variable } & \$ 2 \text { per unit } \
\text { Fixed } & \$ 150,000\
\text { Selling \& Administrative Costs }\
\text { Fixed selling } & \$ 30,000 \
\text { Variable selling } & \$ 1 \text { per unit } \
\text { Fixed administrative } & \$ 20,000
\end{array}$ 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?

Question

Quizplus · Accepted Answer

Under variable costing, fixed manufacturing overhead is not included in product costs but expensed in the period incurred. The difference in net income between full costing and variable costing is due to the fixed manufacturing overhead deferred in inventory. With 5,000 units in ending inventory, $15,000 ($150,000/50,000 units * 5,000 units) of fixed overhead is deferred, reducing net income by that amount under variable costing. Thus, net income would be $265,000 - $15,000 = $250,000.

Radial Fuel Cells Experienced the Following Costs in 2014 (Assume