Question

Yates Company shows the following unit costs for its product:

Direct materials $40
Direct labor 30
Variable overhead 2
Fixed overhead 5
Yates started the year with 8,000 units in inventory, produced 50,000 units during the year, and sold 55,000 units. The value of ending inventory is:___________
a. greater under variable costing than absorption costing.
b. greater under absorption costing than variable costing.
c. the same under both variable and absorption costing.
d. There is no ending inventory
e. This situation cannot han

Answer 1

b. greater under absorption costing than variable costing.

Step-by-step explanation:

The question is to calculate the closing value of inventory and based on the choices, we need to calculate based on both the Absorption Costing and the Variable Costing Methods.

1. Closing Inventory based on Variable Costing Method

Direct Material $40

Direct Labour $30

Variable Overhead $2

Fixed Overhead $0 (this method does not reecognise fixed cost

Totals (Unit cost of Production) $72

Based on this, the closing inventory is $72 x (8,000+50,000-55,000 units)

=$77 x 3,000= $216,000

2. Closing Inventory based on Absorption Costing Method

Direct Material $40

Direct Labour $30

Variable Overhead $2

Fixed Overhead $5

Totals (Unit cost of Production) $77

Based on this, the closing inventory is $77 x (8,000+50,000-55,000 units)

=$77 x 3,000= $231,000

Based on these calculations:

The Ending Inventory is higher/Greater under absorption costing than variable costing and the reason is that variable costing does not recognize fixed cost in determining the value of ending inventory.