Dremmon Corporation uses a standard cost accounting system. Data for the last fiscal year are as follows:
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Units
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Beginning inventory of finished goods
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100
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Production during the year
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700
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Sales
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750
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Ending inventory of finished goods
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50
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Per Unit
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Product selling price
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$200
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Standard variable manufacturing cost
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90
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Standard fixed manufacturing cost
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20*
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Budgeted selling and administrative costs (all fixed)
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$45,000
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*Denominator level of activity is 750 units for the year.
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There were no price, efficiency, or spending variances for the year, and actual selling and administrative expenses equaled the budget amount. Any volume variance is written off to cost of goods sold in the year incurred. There are no work-in-process inventories.
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If Dremmon uses absorption costing, its operating income earned in the last fiscal year was:
A. $28,000
B. $30,000
C. $21,500
D. $27,000
I know the answer is C., but my question is: can the production variance every be negative, meaning can it be subtracted from cost instead of adding to it? Also why is the production variance included for absorption costing if absorption (full) costing's fixed manufacturing is based on sales of that current period?
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