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.
C) The ending inventory under variable costing will be $900 lower than the ending inventory under absorption costing.
D) Under absorption costing, the units in ending inventory will be costed at $2.50 each.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead is allocated to each unit produced. Since 600 units remain in inventory (3,000 produced - 2,400 sold), the fixed overhead per unit is $4,500 / 3,000 = $1.50. Therefore, the ending inventory under absorption costing includes this fixed overhead, making it $900 higher than under variable costing (600 units x $1.50).

Silver Company Produces a Single Product