Monika reported $50,000 income using absorption costing for a company that produced 20,000 units but only sold 18,000 units. Standard variable costs were $21 per unit and fixed overhead was budgeted at $80,000. If there were no variances, income under variable costing would be calculated by treating fixed costs as a period expense, resulting in a different valuation of closing inventory and thus a different reported income than under absorption costing.

1. Monika reported $50,000 of income for the year by using absorption costing. The company had
no beginning inventory, planned and actual production of 20,000 units, and sales of 18,000 units.
Standard variable manufacturing costs were $21 per unit, and total budgeted fixed manufacturing
overhead was $80,000. if there were no variances, income under variable costing would be:
Solution
Calculation of Sales:
Income under absorption costing = $50000
There is no variance.
Variable cost of goods sold under variable costing:
Calculation of Inccome under variable costing:
Under variable costing Fixed cost is treated as period cost and is charged in the year it has been
incurred.
The diffrence in the valuation of closing stock makes the diffrence in the income of the two
statement.
Units Produced 20000
Less: Units sold 18000
Closing stock 2000