Brady, Inc. 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: Denominator volume 25,000 units
Unit sales 20,000 units
Cost of goods sold $170,000
Volume variance $5,040 Unfavourable
Operating income after adjusting for
The volume variance $40,000
Budgeted fixed overhead $90,000
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, the cost of goods sold would be:
A)$133,280
B)$93,100
C)$98,000
D)$111,720

Question

Quizplus · Accepted Answer

Under variable costing, fixed overhead is not included in the cost of goods sold. The volume variance indicates that fixed overhead was over-applied by $5,040. Therefore, the fixed overhead included in the cost of goods sold under absorption costing ($170,000) needs to be adjusted by removing the fixed overhead portion. The calculation is: $170,000 - $90,000 (budgeted fixed overhead) + $5,040 (volume variance) = $85,040. Subtracting this from $170,000 gives $98,000.