Final answer:
Under direct costing, only variable costs are included in inventory valuation, leading to a $200 decrease in the dollar amount of ending inventory for Jones Company when compared to absorption costing.
Step-by-step explanation:
When considering the difference in ending inventory valuation under direct costing (also known as variable costing) and absorption costing, the key aspect to consider is how fixed manufacturing costs are allocated. Under direct costing, only variable costs are included in the inventories, while under absorption costing, both variable costs and a portion of the fixed costs are included.
Jones Company manufactured 700 units, with ending inventory at 100 units. Variable manufacturing costs are $6.00 per unit and fixed costs are $2.00 per unit. Under absorption costing, ending inventory would include both variable and fixed costs, meaning $8.00 per unit ($6.00 + $2.00) for 100 units equating to $800. However, under direct costing, ending inventory would only include the variable cost of $6.00 per unit for 100 units, amounting to $600. The change in dollar amount when switching to direct costing would be a reduction of $200 ($800 - $600).
Therefore, the direct answer in 2 lines to the student's question is: there would be a $200 decrease in the dollar amount of ending inventory if direct costing was used instead of absorption costing. The correct choice is (a).