Last year,Silver Company's total variable production costs were $7,500,and its total fixed manufacturing overhead costs were $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 average cost of the units in the ending inventory will be $4 each.
B) The operating income under absorption costing for the year will be $900 lower than the 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 average cost of the units in ending inventory will be $2.50 each.

Question

Quizplus · Accepted Answer

Variable costing includes only variable production costs in the cost of inventory. Under variable costing, the ending inventory will include only the variable cost of $2.50 per unit ($7,500 total variable costs / 3,000 units produced) for the 600 units not sold (3,000 produced - 2,400 sold), totaling $1,500. Under absorption costing, both variable costs and a portion of fixed manufacturing overhead costs are included in the cost of inventory. The fixed overhead cost per unit is $1.50 ($4,500 total fixed costs / 3,000 units produced). Therefore, the cost per unit under absorption costing is $4 ($2.50 variable cost + $1.50 fixed overhead). For the 600 units in ending inventory, this totals $2,400 ($4 * 600 units). The difference between the ending inventory valuations under the two costing methods is $900 ($2,400 under absorption costing - $1,500 under variable costing).

Last Year,Silver Company's Total Variable Production Costs Were $7,500,and Its