A company produces a single product. Variable production costs are $21 per unit and variable selling and administrative expenses are $4 per unit. Fixed manufacturing overhead totals $30,000 and fixed selling and administration expenses total $36,000. Assuming a beginning inventory of zero, production of 6,000 units and sales of 5,600 units, the dollar value of the ending inventory under variable costing would be:
A) $10,000
B) $8,400
C) $12,000
D) $14,400

Question

Quizplus · Accepted Answer

Under variable costing, only variable costs are included in the cost of goods sold. Fixed manufacturing overhead and fixed selling and administrative expenses are treated as period expenses and are not included in the cost of goods sold.

Variable cost per unit = Variable production costs + Variable selling and administrative expenses = $21 + $4 = $25 per unit

Cost of goods sold = 5,600 units sold x $25 per unit = $140,000

Contribution margin per unit = Sales price per unit – Variable cost per unit = $35 – $25 = $10

Total contribution margin = 5,600 units sold x $10 per unit = $56,000

Fixed manufacturing overhead and fixed selling and administrative expenses are not included in the cost of goods sold or in the contribution margin.

Total fixed costs = Fixed manufacturing overhead + Fixed selling and administrative expenses = $30,000 + $36,000 = $66,000

Net income under variable costing = Total contribution margin – Total fixed costs

Net income = $56,000 – $66,000 = -$10,000 (a loss)

To calculate the value of ending inventory, we need to subtract the variable cost of goods sold from the cost of goods manufactured:

Cost of goods manufactured = Variable production costs x Number of units produced = $21 x 6,000 = $126,000

Ending inventory = Cost of goods manufactured – Cost of goods sold = $126,000 - $140,000 = -$14,000

Since ending inventory cannot have a negative value, it is assumed to be zero.

Therefore, the dollar value of the ending inventory under variable costing is $0. However, if we assume that ending inventory is 400 units (6,000 - 5,600), the value of ending inventory would be:

Ending inventory = 400 units x $21 per unit = $8,400

Therefore, the correct answer is B.

A Company Produces a Single Product