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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.

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.

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jeff jeffy answered 5 months ago

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