Question

Southern Tier manufactures a single product and has the following cost structure: Variable costs per unit:...

Southern Tier manufactures a single product and has the following cost structure:

Variable costs per unit: $ 38
Production
Selling and administrative $ 14
Fixed costs per year:
Production $ 140,000
Selling and administrative $ 84,000

Last year, 7,000 units were produced and 6,800 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:

Group of answer choices

A) $6,800 less than under absorption costing.

B) the same as absorption costing.

C) $6,800 greater than under absorption costing.

D) $4,000 less than under absorption costing.

Business   Accounting   
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Homework Answers

Answer #1

Ending inventory under variable costing:

Variable cost per unit= 38

Ending inventory = 7000 - 6800 = 200

Value of closing inventory = 200 x 38 = $7,600

Ending inventory under absorption costing:

Cost per unit under absorption costing= 38 + (140000/7000)

= 38 + 20 = 58

Closing stock = 58 x 200 = $11,600.

Difference in ending inventory = 11600 - 7600 = $4000.

So ending inventory under variable costing is $4000 less than value under absorption costing.

Hence the correct answer is Option D.

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