Canyon reported $106,000 of net 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, net 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, both variable and fixed manufacturing costs are included in the cost of goods sold. Using the information given, the total manufacturing cost per unit would be $15 + ($150,000/50,000) = $18 per unit. The cost of goods sold would be $18 x 47,000 units = $846,000. Since there was no beginning inventory, the entire cost of goods sold would be deducted from revenue. Total revenue would be $18 x 50,000 units = $900,000. Therefore, net income under absorption costing would be $900,000 - $846,000 = $54,000. However, this includes $9,000 of fixed manufacturing overhead costs that were not included in the variable costing calculation. To adjust for this, we add the fixed overhead to the net income calculated using variable costing: $106,000 + $9,000 = $115,000.

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