Asked by Joyce Beddingfield on Apr 26, 2024
Verified
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.
Variable Costing
An accounting technique that involves only variable costs like direct materials, direct labor, and variable manufacturing overhead in the costing of products.
Absorption Costing
A method of accounting that incorporates all costs related to manufacturing—including direct materials, direct labor, and all manufacturing overheads, whether fixed or variable—into the product's cost.
Carrying Value
The book value of an asset on a balance sheet, representing its acquisition cost minus depreciation or amortization.
- Understand the key differences between variable costing and absorption costing methods.
- Analyze the impact of fixed manufacturing overhead on inventory valuation and net operating income.
Verified Answer
= $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.
Learning Objectives
- Understand the key differences between variable costing and absorption costing methods.
- Analyze the impact of fixed manufacturing overhead on inventory valuation and net operating income.
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