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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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Answer:

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 .

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