# BEC MCQ -Cant figure Out PART 3

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amaffei
Participant

At the start of its fiscal year, a company anticipated producing 300,000 units throughout the year. The annual budgeted manufacturing OH was 150K for variable costs and 600K for fixed costs. In April, when there was a beginning inventory for finished goods of 5,000 units, the company showed an income of 40K 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? Answer is 36K – I cant get it

amaffei
Participant

Can anyone please help on this question – its the last one I need to figure out – I'd appreciate it very much – thank u

nika_cpa
Member

First figure out how many units were sold in April:

300000/12=25000 per month budgeted to be manufactured

Beg. Inv 5000 + 25000 budgeted manuf. -7000 ending inv = 23000 units COGS

Under absorption cost fixed costs assigned only to units sold = 600000/300000=\$2 per unit

Under variable all fixed costs charged to Income stmt. Thus 25000 budgeted – 23000 sold = 2000 units x \$2 = \$4,000 fixed cost were charged extra to net income under var. costing vs absorp. costing where these costs pushed to ending inventory. \$40,000-\$4,000 extra = \$36,000 net income under var. costing.

I hope this helps!

farhan8922
Participant

pefect explanation

Gias Ahmed
Participant

Excess Inventory = 7,000 ending – 5,000 beginning = 2,000 units.
\$600,000/300,000 units = \$2 x 2,000 units = \$4,000.
Therefore variable costing income for the month of April is \$36,000 (\$40,000 – \$4,000 additional expenses).

Mujahid_ Abu Dahda
Participant

I GO WITH GIAS AHMED'S EXPLANATION. THAT IS HOW I FELT IT SHOULD BE APPROACHED.

ALTERNATIVELY, ONE WOULD SAY THE DIFFERENCE BETWEEN THE TWO APPROACHES IN TERMS OF PROFIT IS CLOSING INVENTORY VALUED AT FIXED MANUFACTURING OH. SINCE THERE IS OPENING INVENTORY, THIS WILL REDUCE THE CLOSING INVENTORY BY 5,000 UNITS. SO CLOSING INVENTORY VALUATION WILL BE 2000 UNITS X \$2 PER UNIT OF FIXED COST = \$4,000

HENCE MARGINAL COSTING PROFIT WILL BE \$4000 LESS OF ABSORPTION COSTING PROFIT BCOS OF THE INCREASE IN CLOSING INVENTORY.

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