Fields Cutlery, a manufacturer of gourmet knife sets, produced 20,000 sets and sold 23,000 units during the current year. Beginning inventory under absorption costing consisted of 3,000 units valued at $66,000 (Direct materials $12 per unit; Direct labor, $3 per unit; Variable Overhead, $2 per unit, and Fixed overhead, $5 per unit.) All manufacturing costs have remained constant over the 2-year period. At year-end, the company reported the following income statement using absorption costing: 60% of total selling and administrative expenses are variable. Compute net income under variable costing.
A) $414,000
B) $399,000
C) $529,000
D) $429,000
E) $644,000

Question

Fields Cutlery, a manufacturer of gourmet knife sets, produced 20,000 sets and sold 23,000 units during the current year. Beginning inventory under absorption costing consisted of 3,000 units valued at $66,000 (Direct materials $12 per unit; Direct labor, $3 per unit; Variable Overhead, $2 per unit, and Fixed overhead, $5 per unit.) All manufacturing costs have remained constant over the 2-year period. At year-end, the company reported the following income statement using absorption costing:  60% of total selling and administrative expenses are variable. Compute net income under variable costing.
A) $414,000 
B) $399,000 
C) $529,000 
D) $429,000 
E) $644,000

Quizplus · Accepted Answer

Under variable costing, only variable manufacturing costs are included in the cost of goods sold. Fixed manufacturing costs are treated as period costs and are expensed in the period incurred. Therefore, the beginning inventory fixed overhead cost of $5 per unit is not included in the cost of goods sold.

Variable manufacturing cost per unit = Direct materials + Direct labor + Variable overhead = $12 + $3 + $2 = $17

Cost of goods sold under variable costing = (20,000 sets + 3,000 beginning inventory – 23,000 units sold) × $17 per unit = $160,000

Variable selling and administrative expenses = 0.60 × total selling and administrative expenses = 0.60 × ($120,000 + $40,000) = $72,000

Net income under variable costing = Sales – Variable manufacturing costs – Variable selling and administrative expenses – Fixed manufacturing overhead 
= $805,000 - $160,000 - $72,000 - ($5 × 23,000) 
= $429,000

Fields Cutlery, a Manufacturer of Gourmet Knife Sets, Produced 20,000