Silver Rex,Inc.has provided the following data for the year ended December 31,2017: $$\begin{array} { | l | r | }
\hline \text { Direct materials } & \$ 10 \text { per unit } \
\hline \text { Direct labor } & \$ 15 \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 20 \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 25,000 \text { per year } \
\hline \text { Fixed selling and administrative costs } & \$ 15,000 \text { per year } \
\hline \text { Sales price } & \$ 75 \text { per unit } \
\hline \text { Beginning Finished Goods Inventory } & 500 \text { units } \
\hline \text { Units produced } & 5,000 \text { units } \
\hline \text { Units sold } & 4,500 \text { units } \
\hline
\end{array}$$ Requirements:
A)Compute Silver Rex's unit product cost under absorption costing and variable costing.
B)Prepare income statements for Silver Rex using absorption costing and variable costing.
C)Calculate the balance in Finished Goods Inventory using absorption costing and variable costing.
Assume that the production level,costs,and sales prices were the same in the previous year.

Question

Silver Rex,Inc.has provided the following data for the year ended December 31,2017: $$\begin{array} { | l | r | } 
\hline \text { Direct materials } & \$ 10 \text { per unit } \
\hline \text { Direct labor } & \$ 15 \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 20 \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 25,000 \text { per year } \
\hline \text { Fixed selling and administrative costs } & \$ 15,000 \text { per year } \
\hline \text { Sales price } & \$ 75 \text { per unit } \
\hline \text { Beginning Finished Goods Inventory } & 500 \text { units } \
\hline \text { Units produced } & 5,000 \text { units } \
\hline \text { Units sold } & 4,500 \text { units } \
\hline
\end{array}$$ Requirements:
A)Compute Silver Rex's unit product cost under absorption costing and variable costing.
B)Prepare income statements for Silver Rex using absorption costing and variable costing.
C)Calculate the balance in Finished Goods Inventory using absorption costing and variable costing.
Assume that the production level,costs,and sales prices were the same in the previous year.

Quizplus · Accepted Answer

Absorption costing:
Direct materials per unit = ($450,000 ÷ 15,000) = $30
Direct labor per unit = ($300,000 ÷ 15,000) = $20
Variable manufacturing overhead per unit = ($150,000 ÷ 15,000) = $10
Fixed manufacturing overhead per unit = ($200,000 ÷ 15,000) = $13.33
Unit product cost under absorption costing = $30 + $20 + $10 + $13.33 = $73.33 per unit

Variable costing:
Direct materials per unit = $30
Direct labor per unit = $20
Variable manufacturing overhead per unit = $10
Unit product cost under variable costing = $30 + $20 + $10 = $60 per unit

B) Income statements:
Absorption costing:

Variable costing:

C) Finished goods inventory:
Absorption costing:
Beginning finished goods inventory = 0
Ending finished goods inventory = (15,000 units × $73.33 per unit) - (10,000 units × $73.33 per unit) = $549,750
Finished goods inventory balance under absorption costing = $549,750

Variable costing:
Beginning finished goods inventory = 0
Ending finished goods inventory = (15,000 units × $60 per unit) - (10,000 units × $60 per unit) = $450,000
Finished goods inventory balance under variable costing = $450,000

Answer: Choice A
 
The best choice is to use variable costing. Variable costing only includes the variable manufacturing costs in the cost of goods sold calculation, providing a clearer picture of the cost per unit, and is often preferred for internal decision making. However, absorption costing is required for external financial reporting purposes. The use of variable costing in this case results in a lower unit product cost and a lower ending finished goods inventory balance compared to absorption costing.

Silver Rex,Inc Requirements: A)Compute Silver Rex's Unit Product Cost Under Absorption Costing

Silver Rex,Inc Requirements:
A)Compute Silver Rex's Unit Product Cost Under Absorption Costing