Question

A business operated at 100% of capacity during its first month and incurred the following costs:

Production costs (10,000 units):
Direct materials	$170,000
Direct labor	360,000
Variable factory overhead	190,000
Fixed factory overhead	50,000	$770,000
Operating expenses:
Variable operating expenses	$ 60,000
Fixed operating expenses	18,000	78,000

If 500 units remain unsold at the end of the month, what is the amount of inventory that would be reported on the variable costing balance sheet?

a.$41,500

b.$42,800

c.$38,500

d.$36,000

Answer 1

d.$36,000

Working:

Step-1:Calculate Variable manufacturing costs:
Direct Materials		$ 1,70,000
Direct Labor		$ 3,60,000
Variable factory overhead		$ 1,90,000
Total Variable manufacturing costs		$ 7,20,000
Step-2:Calculate Variable manufacturing cost per unit produced
Total Variable manufacturing costs		$ 7,20,000
÷ Tota Units produced		10,000
Variable Manufacturing cost per unit		$       72.00
Step-3:Cost of ending inventory
Cost of ending inventory	=	Units in Ending Inventory x Variable Manufaturing cost per unit
	=	500	x	$    72.00
	=	$     36,000
Under Variable costing, fixed manufacturing overhead costs are expensed in the period in which it incurred.So, such costs are not
included in ending inventory.