Question

Linda is studying the working papers from her client's 2025 income statement because her manager wants her to reconstruct that same income statement without the benefit of first seeing the finished product. She knows the client uses standard costing within its accounting system, but she has to figure out which inventory costing method it uses. The working paper shows the following details: No other variances were reported, and the prior year per-unit costs were the same as the 2025 per-unit costs.

Which inventory costing method did the client use in 2025 . variable or absorption?
______
How much did the client capitalize into inventory on a per-unit basis?
Inventory cost per unit $_____

Answer 1

Linda is looking to determine if the client used variable costing or absorption costing by checking the working papers for fixed overheads capitalized into inventory.

Step-by-step explanation:

The income statement that Linda needs to reconstruct requires understanding whether the client is using variable costing or absorption costing.

In variable costing, only the variable costs are capitalized into the inventory. In absorption costing, both fixed and variable manufacturing overheads are included in the cost of inventory. To determine which method the client used, Linda needs to look for evidence of fixed overheads being capitalized into the inventory.

If there are no fixed overheads included, it suggests that variable costing was used. As for the inventory cost per unit, without the actual numbers from the working papers, it is unable to calculate the exact amount the client capitalized into inventory on a per-unit basis.

The client used the absorption costing method in 2025.

In absorption costing, both variable and fixed manufacturing costs are included in the cost of inventory. This method assigns all manufacturing costs to the units produced, whether they are fixed or variable costs.

The inventory cost per unit can be calculated by dividing the total manufacturing costs incurred by the number of units produced. Since no other variances were reported and the prior year per-unit costs were the same as the 2025 per-unit costs, the inventory cost per unit would be the same as the total manufacturing costs divided by the number of units produced.