Silver Corporation produces a single product. Last year, the company's variable production costs totaled $7,500 and its fixed manufacturing overhead costs totaled $4,500. The company produced 3,000 units during the year and sold 2,400 units. There were no units in the beginning inventory. Which of the following statements is true? A) Under variable costing, the units in the ending inventory will be costed at $4.00 each. B) The net operating income under absorption costing for the year will be $900 lower than the net operating income under variable costing. C) The ending inventory under variable costing will be $900 lower than the ending inventory under absorption costing D) Under absorption costing, the units in ending inventory will be costed at $2.50 each.

Question

Business

Selene

27 March, 19:37

Silver Corporation produces a single product. Last year, the company's variable production costs totaled $7,500 and its fixed manufacturing overhead costs totaled $4,500. The company produced 3,000 units during the year and sold 2,400 units. There were no units in the beginning inventory. Which of the following statements is true? A) Under variable costing, the units in the ending inventory will be costed at $4.00 each. B) The net operating income under absorption costing for the year will be $900 lower than the net operating income under variable costing. C) The ending inventory under variable costing will be $900 lower than the ending inventory under absorption costing D) Under absorption costing, the units in ending inventory will be costed at $2.50 each.

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Answers (1)

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Mariam Cisneros · Answer 1

C) The ending inventory under variable costing will be $900 lower than the ending inventory under absorption costing

Explanation:

Silver Corporation

Given Data

Variable production costs $7,500

Fixed manufacturing overhead costs $4,500

Units produced 3,000

Units sold 2,400

Lets analyze these statements

A) Under variable costing, the units in the ending inventory will be costed at $4.00 each.

Wrong

Variable Cost per unit = Variable production costs/Units produced = $7,500/3,000 = $ 2.5

The Fixed costs will be treated as period costs and ending inventory will be evaluated at 600 * $ 2.5 = $1500

B) The net operating income under absorption costing for the year will be $900 lower than the net operating income under variable costing.

Wrong

Under absorption costing the net operating income will be higher than net income under variable costing as fixed cost will be treated as product costs not period costs.

C) The ending inventory under variable costing will be $900 lower than the ending inventory under absorption costing

True

This is because in variable costing the fixed costs are treated as period costs rather than product costs.

Absorption unit cost = $ 4

Variable Unit cost = $ 2.5

Difference = $ 1.5

Ending Inventory = 600 * 1.5 = $ 900

so the ending inventory under variable costing will be $900 lower than the ending inventory under absorption costing

D) Under absorption costing, the units in ending inventory will be costed at $2.50 each.

Wrong

Under absorption costing the costs per unit will be = Variable + Fixed / No of Units = $7,500 + $4,500/3,000 = 12000/3000 = $ 4 per unit.

So ending Inventory will be 600 * $ 4 = $ 2400