Razor Technologies reported $106,000 of income for the year by using variable costing.The company had no beginning inventory, planned and actual production of 50,000 units, and sales of 47,000 units.Standard variable manufacturing costs were $15 per unit, and total budgeted ﬁxed manufacturing overhead was $150,000.If there were no variances, income under absorption costing would be:
A)$52,000.
B)$97,000.
C)$106,000.
D)$115,000.
E)$160,000.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead is included in the cost of each unit produced. The budgeted fixed overhead for the year is $150,000, so the fixed overhead per unit is $150,000/50,000 units = $3 per unit.

Total manufacturing cost per unit under absorption costing is:
Variable manufacturing cost per unit + fixed manufacturing overhead per unit
= $15 + $3
= $18

Total cost of goods sold under absorption costing is:
Total manufacturing cost per unit × number of units sold
= $18 × 47,000
= $846,000

Since income under absorption costing includes fixed manufacturing overhead, it is higher than income under variable costing. The difference between the two is the fixed manufacturing overhead that is deferred in inventory under absorption costing. Since there was no beginning inventory, there is no deferred fixed overhead.

Income under absorption costing = Sales – Cost of goods sold – Fixed manufacturing overhead
= $106,000 – $846,000 – $150,000
= -$890,000

However, a negative income does not make sense. This is because absorption costing assumes that fixed manufacturing overhead is a product cost, while variable costing treats it as a period cost. In a period of low production or sales, absorption costing may assign a large portion of fixed overhead to each unit produced, resulting in a low net income or even a loss.

Razor Technologies Reported $106,000 of Income for the Year by Using