At the start of its fiscal year, a company anticipated producing 300,000 units throughout the year. The annual budgeted manufacturing overhead was $150,000 for variable costs and $600,000 for fixed costs. In April, when there was a beginning inventory for finished goods of 5,000 units, the company showed an income of $40,000 using absorption costing. That same month, ending inventory for finished goods was 7,000 units. What amount would the company recognize as income for April using variable costing?

Question

Business

Stella

2 January, 01:19

At the start of its fiscal year, a company anticipated producing 300,000 units throughout the year. The annual budgeted manufacturing overhead was $150,000 for variable costs and $600,000 for fixed costs. In April, when there was a beginning inventory for finished goods of 5,000 units, the company showed an income of $40,000 using absorption costing. That same month, ending inventory for finished goods was 7,000 units. What amount would the company recognize as income for April using variable costing?

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Kristian · Answer 1

The correct answer to the following question is $36,000.

Explanation:

Given information -

Units anticipated to be produced - 300,000 units

Variable cost - $150,000

Fixed cost - $600,000

Beginning inventory - 5000 units

Ending inventory - 7000 units

Income under absorption costing - $40,000

Now under the absorption costing, rate of fixed overhead cost per unit -

Fixed cost / Number of units produced

= $600,000 / 300,000

= $2

In April (under absorption costing), the amount of fixed manufacturing overhead cost that was still embedded in ending inventory but were not expense -

Fixed overhead rate per unit x number of units produced but not sold

= $2 x 2000 (7000 units - 5000 units)

= $4000

So when we calculate the operating cost under variable costing this fixed overhead cost wold be subtracted from total income -

$40,000 - $4000

= $36,000.