Brady Ltd uses a normal absorption costing system in which the overhead rate and variable manufacturing costs have remained unchanged for the last 2 years. During the current year the following activity occurred: The firm had no beginning or ending work in process inventories. However, there were 1,000 units in beginning finished goods.
If variable costing had been used, operating profit would be
A) $27,040
B) $56,560
C) $52,960
D) $45,040

Question

Quizplus · Accepted Answer

Variable costing would reduce the cost of goods sold by the amount of fixed overhead applied to the beginning finished goods inventory. This is because variable costing only includes variable costs in the cost of goods sold. In this case, the fixed overhead applied to the beginning finished goods inventory is $10,000 (1,000 units x $10 per unit). Therefore, the operating profit would be $56,560 ($66,600 - $10,000) if variable costing had been used.

Brady Ltd Uses a Normal Absorption Costing System in Which