Red and White Company reported the following monthly data: Units produced 3,100 units, Sales...


Red and White Company reported the following monthly data:

Units produced {eq}3,100 {/eq} units

Sales price {eq}\$36 {/eq} per unit

Direct materials {eq}\$6 {/eq} per unit

Direct labor {eq}\$7 {/eq} per unit

Variable overhead {eq}\$8 {/eq} per unit

Fixed overhead {eq}\$8,990 {/eq} in total

What is Red and White's net income under variable costing if {eq}1,090 {/eq} units are sold and operating expenses are {eq}\$12,800 {/eq}?

Variable Costing Method:

The variable costing method of the income statement is used in managerial accounting for analysis of costs and revenues for internal decision making. Absorption costing, on the other hand, is used for external reporting purposes.

Answer and Explanation:

Computation of net income under variable costing method:

Description Amount ($) Amount ($)
Sales (1,090 units) $39,240.00
Less: Variable cost of goods sold
Direct material $6,540.00
Direct labor $7,630.00
Variable overhead $8,720.00
Total variable manufacturing cost $22,890.00
Gross margin $16,350.00
Less: Fixed manufacturing overhead $8,990.00
Other operating expenses $12,800.00
Total other expenses $21,790.00
Net income (loss) from operations -$5,440.00

Under variable costing approach, variable manufacturing costs are treated as product costs and fixed costs and other selling and administrative expenses are treated as period costs.

The cost of ending inventory is not subtracted as only the cost of units sold is charged to the income statement.

Learn more about this topic:

Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5

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