This answer results from multiplying the standard variable manufacturing cost per unit and the standard fixed manufacturing cost per unit by the number of units produced, not by the number of units sold. Income statements are based on the number of units sold, not on the number of units produced. The company produced 700 units and sold 750 units, so they sold 50 units from their beginning inventory, and the cost of those units needs to be included in the cost of goods sold. Beginning inventory is costed at the previous year's costs; and since the previous year's variable costs per unit were the same as the current year's budgeted and actual costs, we can use the current year's variable manufacturing costs for all 750 units sold. The problem says there were no spending variances, and therefore we know that the fixed manufacturing cost incurred was the same as the fixed manufacturing cost budgeted. Therefore, we can use the standard fixed manufacturing cost per unit and the denominator level of activity to calculate the total fixed manufacturing overhead that was budgeted, and we will also have the actual fixed manufacturing overhead that was incurred. The full amount of the actual fixed manufacturing cost is expensed.
Since there were no price, efficiency or spending variances, that means actual costs per unit were the same as the standard costs per unit for the year. Thus, we can use the standard costs per unit given as actual amounts for purposes of calculating operating income under variable costing. Income statements are based on the number of units sold, not on the number of units produced. The company produced 700 units and sold 750 units, so they sold 50 units from their beginning inventory, and the cost of those units needs to be included in the cost of goods sold. Beginning inventory is costed at the previous year's costs; and since the previous year's variable costs per unit were the same as the current year's budgeted and actual costs, we can use the current year's variable manufacturing costs for all 750 units sold. Under variable costing, only variable manufacturing costs are inventoried, while fixed manufacturing costs are expensed as incurred. The problem says there were no spending variances, and therefore we know that the fixed manufacturing cost incurred was the same as the fixed manufacturing cost budgeted. Therefore, we can use the standard fixed manufacturing cost per unit and the denominator level of activity to calculate the total fixed manufacturing overhead that was budgeted, and we will also have the actual fixed manufacturing overhead that was incurred. We know that the standard fixed manufacturing cost per unit ($20) was calculated by dividing the total budgeted fixed manufacturing cost by the anticipated production of 750 units. Therefore, we can multiply the $20 per unit standard cost by the anticipated production of 750 units, and we will have the budgeted total fixed manufacturing cost. As we said, since there were no spending variances for the year, the actual fixed manufacturing cost is the same as the budgeted fixed manufacturing cost, and the full amount of the actual fixed manufacturing cost, or $15,000, is expensed. Actual selling and administrative cost is the same as the budgeted selling and administrative cost, so that is used as given. And since there were no production variances, no variances needed to be written off to cost of goods sold, so that is an adjustment that does not need to be made. The income statement using variable costing was Sales revenue: 750 units @ $200 $150,000 Variable cost: 750 units @ $90 67,500 Contribution margin $ 82,500 Fixed mfg. cost: $20 standard cost × 750 (denomin. level of activity) $ 15,000 Selling and administrative cost 45,000 Net operating income $ 22,500
This is the operating income using absorption costing.
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