Question

The Southern Corporation manufactures a single product and has the following cost structure: Variable costs per unit: Production $ 44 Selling and administrative $ 16 Fixed costs per year: Production $ 129,010 Selling and administrative $ 109,660 Last year, 6,790 units were produced and 6,690 units were sold. There was no beginning inventory. The carrying value on the balance sheet of the ending inventory of finished goods under variable costing would be:

Answer 1

Answer: $1,900 less than under absorption costing.

Explanation:

The ending inventory of finished goods under variable costing is the difference in carrying value of ending finished goods inventory.

That is calculated as,

Difference in Carrying Value of Ending Finished Goods Inventory = Unit fixed Manufacturing Overhead * Change in Inventory in Units

The Unit Fixed Manufacturing Overhead as implied is the fixed Manufacturing Overhead per unit

Calculated therefore as,

Unit fixed manufacturing overhead = 129,010 / 6,790

= $19

Now that we have that, we can refer back to thw first formula,

Difference in carrying value of ending finished goods inventory = Unit fixed manufacturing overhead * Change in inventory in units

= 19 × (6,790 - 6,690)

= $1,900

The carrying value on the balance sheet of the ending inventory of finished goods under variable costing would be $1,900 less than under absorption costing.