Monex reported $65,000 of net 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, net 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, fixed manufacturing overhead is treated as a period cost and is not included in inventory valuation. Thus, the net income under variable costing only includes the variable manufacturing costs. 
Variable manufacturing cost per unit = Standard variable manufacturing costs = $20 per unit 
Total variable manufacturing cost = Number of units produced x Variable manufacturing cost per unit = 20,000 x $20 = $400,000 
Cost of goods sold = Variable manufacturing cost per unit x Number of units sold = $20 x 18,000 = $360,000 
Gross profit = Sales - Cost of goods sold = $0. 
Net income under variable costing = Gross profit - Fixed manufacturing overhead = $0 - $100,000 = -$100,000. 
However, this does not reflect the actual profitability of the company, as it ignores the fixed manufacturing overhead costs that are necessary to produce the units. Therefore, the best answer is B, which is the only option that is close to the actual net income of $65,000 reported under absorption costing.

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