The Southern Corporation manufactures a single product and has the following cost structure: 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:
A) the same as absorption costing.
B) $6,800 greater than under absorption costing.
C) $6,800 less than under absorption costing.
D) $4,000 less than under absorption costing.

Question

The Southern Corporation manufactures a single product and has the following cost structure:  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:
A) the same as absorption costing. 
B) $6,800 greater than under absorption costing. 
C) $6,800 less than under absorption costing. 
D) $4,000 less than under absorption costing.

Quizplus · Accepted Answer

Fixed manufacturing overhead per unit = Fixed manufacturing overhead ÷ Units produced
= $140,000 ÷ 7,000 units = $20 per unit
Units in ending inventory = Units in beginning inventory + Units produced - Units sold
= 0 units + 7,000 units - 6,800 units = 200 units
Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing overhead in ending inventory - Fixed manufacturing overhead in beginning inventory = ($20 per unit × 200 unit) - $0 = $4,000
Therefore, inventory will be $4,000 less under variable costing than under absorption costing.

The Southern Corporation Manufactures a Single Product and Has the Following