Barrett, Inc. reports the following information for the year ended December 31: $\begin{array}{|l|r|l|}
\hline \text { Beginning Finished Goods Inventory } & 60 & \text { units } \
\hline \text { Units produced } & 400 & \text { units } \
\hline \text { Units sold } & 460 & \text { units } \
\hline \text { Sales price } & \$ 160 & \text { per unit } \
\hline \text { Direct materials } & \$ 30 & \text { per unit } \
\hline \text { Direct labor } & \$ 12 & \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 15 & \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 15,900 & \text { per year } \
\hline \text { Variable selling and administrative costs } & \$ 10 & \text { per unit } \
\hline \text { Fixed selling and administrative costs } & \$ 12,500 & \text { per year }\
\hline
\end{array}$
The beginning Finished Goods Inventory costs were $3300 under absorption costing and $3420 under variable costing.
What is the operating income using variable costing?
A) $42,780
B) $45,200
C) $14,380
D) $4780

Question

Barrett, Inc. reports the following information for the year ended December 31: $\begin{array}{|l|r|l|}
\hline \text { Beginning Finished Goods Inventory } & 60 & \text { units } \
\hline \text { Units produced } & 400 & \text { units } \
\hline \text { Units sold } & 460 & \text { units } \
\hline \text { Sales price } & \$ 160 & \text { per unit } \
\hline \text { Direct materials } & \$ 30 & \text { per unit } \
\hline \text { Direct labor } & \$ 12 & \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 15 & \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 15,900 & \text { per year } \
\hline \text { Variable selling and administrative costs } & \$ 10 & \text { per unit } \
\hline \text { Fixed selling and administrative costs } & \$ 12,500 & \text { per year }\
\hline
\end{array}$
 The beginning Finished Goods Inventory costs were $3300 under absorption costing and $3420 under variable costing.
What is the operating income using variable costing?
A) $42,780
B) $45,200
C) $14,380
D) $4780

Quizplus · Accepted Answer

Variable costing includes all variable costs (direct materials, direct labor, variable manufacturing overhead, and variable selling and administrative costs) in the cost of goods sold and deducts fixed costs (fixed manufacturing overhead and fixed selling and administrative costs) from the contribution margin to calculate operating income. To calculate operating income under variable costing, we first determine the cost of goods sold and then subtract it from sales, followed by subtracting fixed costs.1. Calculate variable costs per unit: Direct materials ($30) + Direct labor ($12) + Variable manufacturing overhead ($15) + Variable selling and administrative costs ($10) = $67 per unit.2. Calculate total variable costs for units sold: 460 units sold * $67 = $30,820.3. Calculate sales revenue: 460 units sold * $160 = $73,600.4. Calculate contribution margin: Sales revenue ($73,600) - Total variable costs ($30,820) = $42,780.5. Subtract fixed costs: Fixed manufacturing overhead ($15,900) + Fixed selling and administrative costs ($12,500) = $28,400.6. Calculate operating income: Contribution margin ($42,780) - Fixed costs ($28,400) = $14,380.

Barrett, Inc The Beginning Finished Goods Inventory Costs Were $3300 Under Absorption