Question

Variable and Absorption Costing

Use the following information to answer the following 2 multiple choice
questions:
Information taken from the accounting records of Holly Manufacturing for 2018:

Direct materials used	$340,000
Direct labour	$70,000
Variable manufacturing overhead	$60,000
Fixed manufacturing overhead	$130,000
Variable selling and administrative costs	$40,000
Fixed selling and administrative costs	$20,000
Units produced during the year	40,000
Units in inventory at the end of the year	6,000

There was no opening inventory.

Please do not give the answer only, please provide the process and calculation.

1. Based on the information (above) regarding Holly Manufacturing, calculate the
value of inventory at the end of the year, assuming absorption costing is used.
a) $90,000
b) $96,000
c) $72,000
d) $70,500

2. Based on the information (above) regarding Holly Manufacturing, calculate the
value of inventory at the end of the year, assuming variable costing is used.
a) $90,000
b) $96,000
c) $76,500
d) $70,500  

Answer 1

	Absorption Costing	Variable Costing
Direct Materials	340,000	340,000
Direct Labour	70,000	70,000
Variable manufacturing overhead	60,000	60,000
Fixed Manufacturing overhead	130,000	-
Total Cost	600,000	470,000
Units produced	40,000	40,000
Cost per unit	15.00	11.75
(Total Cost/ No of units)
Units in inventory	6,000	6,000
Inventory cost	90,000	70,500
(Units in Inventory x Cost per unit)

Under absorption cost fixed manufaturing overhead is included while calculating cost per unit of the product. Under variable costing only variable manufacturing expenses are included while calculting cost per unit of the product.

Selling and administrative expenses do not form a part of the valuation of inventory.