The company produces a single product. Last year, the company's variable production costs totaled $8,000 and...

The company produces a single product. Last year, the company's variable production costs totaled $8,000 and its fixed manufacturing overhead costs totaled $4,800. The company produced 4,000 units during the year and sold 3,600 units. Assuming no units in the beginning inventory:

A.	under variable costing, the units in ending inventory will be costed at $3.20 each.

B.	the net operating income under absorption costing for the year will be $480 lower than net operating income under variable costing.
C.	the ending inventory under variable costing will be $480 lower than the ending inventory under absorption costing.
D.	the net operating income under absorption costing for the year will be $800 lower than net operating income under variable costing.

Solutions

Expert Solution

First of all we shall calculate the value of ending inventory under absorption costing as follows:

Ending Inventory = Opening Inventory + Units Produced - Units Sold

= 0 + 4,000 - 3,600

= 400 units.

Per unit value under absorption costing = Total Cost incurred / Total units produced

Total Cost incurred = Total Variable production cost + Fixed Manufacturing Overhead cost

= $ 8,000 + $ 4,800

= $ 12,800

Total Units Produced = 4,000 units

So per unit value under absorption costing = $ 12,800 / 4,000

= $ 3.20 per unit.

Hence value of closing inventory under absorption costing is as follows:

= 400 units x $ 3.20 per unit

= $ 1,280

Now we shall compute value of ending inventory under variable costing as follows:

Per unit value under variable costing = Total Variable Cost incurred / Total units produced

Total variable production cost = $ 8,000

Total Units Produced = 4,000 units

So per unit value under variable costing = $ 8,000 / 4,000

= $ 2 per unit.

Hence value of closing inventory under absorption costing is as follows:

= 400 units x $ 2 per unit

= $ 800

Hence the value of ending inventory under variable costing is $ 800 and the value of ending inventory under absorption costing is $ 1,280, which means value of ending inventory under variable costing is $ 480 less than the value of ending inventory under absorption costing. Hence the correct answer is option c.

Feel free to ask in case of any query relating to this question

jeff jeffy answered 1 week ago

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