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:

Question

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Under absorption costing, fixed manufacturing overhead is allocated to each unit produced. Since the company produced 50,000 units and the total fixed manufacturing overhead was $150,000, the fixed overhead cost per unit is $150,000 / 50,000 units = $3 per unit. With sales of 47,000 units, the cost of goods sold under absorption costing includes both variable costs and fixed overhead costs. The income difference under variable and absorption costing is due to the fixed manufacturing overhead cost of the unsold inventory. The unsold inventory is 50,000 units produced - 47,000 units sold = 3,000 units. The fixed overhead cost allocated to the unsold inventory is 3,000 units * $3 per unit = $9,000. Therefore, the income under absorption costing would be the variable costing income ($106,000) plus the fixed overhead cost allocated to the unsold inventory ($9,000), which equals $115,000.

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