The Browning Company manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit. Actual and budgeted fixed overhead is $900 000 for the year. Information about Browning's production activity for the year is:
Assuming all information is provided above, the difference in profit between absorption and variable costing would be expected to be:

Question

The Browning Company manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit. Actual and budgeted fixed overhead is $900 000 for the year. Information about Browning's production activity for the year is: 
Assuming all information is provided above, the difference in profit between absorption and variable costing would be expected to be:

Quizplus · Accepted Answer

To calculate the difference in profit between absorption and variable costing, we need to calculate the following:

- Variable cost per unit (VC): $8 (given in the problem)
- Fixed manufacturing overhead per unit under absorption costing (FMOH per unit):

FMOH per unit = Total fixed manufacturing overhead / Total units produced
Total units produced = Actual production = 125,000 units (given in the problem)
Total fixed manufacturing overhead = $900,000 (given in the problem)
FMOH per unit = $900,000 / 125,000 units = $7.20 per unit

- The difference in profit would be:

(Difference in profit) = (Net income under absorption costing) - (Net income under variable costing)

Under absorption costing:
Revenue = 125,000 * $20 = $2,500,000
VC = 125,000 * $8 = $1,000,000
Fixed manufacturing overhead = 125,000 * $7.20 = $900,000
Total product cost = $1,000,000 + $900,000 = $1,900,000
Gross profit = $2,500,000 - $1,900,000 = $600,000
Selling and administrative costs = 125,000 * $2 = $250,000
Net income = $600,000 - $250,000 = $350,000

Under variable costing:
Revenue = 125,000 * $20 = $2,500,000
Total variable cost = 125,000 * $8 = $1,000,000
Contribution margin = $2,500,000 - $1,000,000 = $1,500,000
Fixed manufacturing overhead for the year = $900,000 (given in the problem)
Fixed manufacturing overhead per unit under variable costing = $900,000 / 125,000 = $7.20 per unit
Total fixed manufacturing overhead under variable costing = 125,000 * $7.20 = $900,000
Total product cost under variable costing = $1,000,000 + $900,000 = $1,900,000
Net income under variable costing = $2,500,000 - $1,900,000 - $250,000 = $350,000

Therefore, the difference in profit between absorption and variable costing is:

(Difference in profit) = $350,000 - $350,000 = $0

The only choice that matches the calculated difference in profit is choice C, which is the correct answer.

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