Carter 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, all manufacturing costs (both variable and fixed) are included in the cost of goods sold rather than just the variable costs under variable costing. Using the information given, the cost per unit under absorption costing would be $15 (standard variable manufacturing cost) + ($150,000/50,000 units) = $18 per unit. The cost of goods sold would therefore be 47,000 units x $18 per unit = $846,000. This would result in gross profit of $106,000 (reported under variable costing) + $846,000 = $952,000. Subtracting the budgeted fixed manufacturing overhead of $150,000 would give an income under absorption costing of $802,000. However, since there were no variances given, the income under absorption costing would be the same as the income under variable costing, which was $106,000. Therefore, the correct answer is $106,000 + $150,000 = $115,000.

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