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 the cost of goods sold. Fixed manufacturing overhead costs are treated as period expenses and are not included in the calculation of the cost of goods sold. Therefore, income under variable costing can be calculated as follows:
Variable cost per unit = $20
Variable cost of goods sold = 18,000 units x $20 per unit = $360,000
Total fixed manufacturing overhead = $100,000
Income under variable costing = Sales revenue - Variable cost of goods sold - Total fixed manufacturing overhead
= ($20 per unit x 18,000 units) - ($20 per unit x 18,000 units) - $100,000
= $360,000 - $360,000 - $100,000
= -$100,000
Since the company reported $65,000 of income under absorption costing, we can conclude that there are unfavorable fixed overhead variances. Therefore, the income under variable costing would be lower than the income under absorption costing. 
Income under variable costing = $65,000 - Unfavorable fixed overhead variance 
Since the answer choices do not provide any information about the magnitude of the unfavorable fixed overhead variance, we cannot determine the exact value of income under variable costing. However, we know that it must be lower than $65,000. The only answer choice that is lower than $65,000 is B ($55,000).

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