Silver Company produces a single product. Last year, the company’s variable production costs totaled $7,500 and its fixed manufacturing overhead costs totaled $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 units in the ending inventory will be costed at $4 each.
b. The net operating income under absorption costing for the year will be $900 lower than the net operating income under variable costing.
Selected: c. The ending inventory under variable costing will be $900 lower than the ending inventory under absorption costing. This answer is correct.
d. Under absorption costing, the units in ending inventory will be costed at $2.50 each.
Correct! Under absorption costing, we include the cost of fixed manufacturing overhead in inventory, so if we are using variable costing, this would be lower because we don’t include this in inventory. If you take $4,500 divided by 3,000 units, you get $1.50 per unit and if there are 600 units left in ending inventory, that would be 600 units times $1.50 which totals $900.