The Southern Corporation manufactures a single product and has the following cost structure:

The Southern Corporation manufactures a single product and has the following cost structure:

Variable costs per unit:
Production	$	45
Selling and administrative	$	11
Fixed costs per year:
Production	$	142,800
Selling and administrative	$	115,670

Last year, 7,140 units were produced and 6,840 units were sold. There was no beginning inventory.

The carrying value on the balance sheet of the ending inventory of finished goods under variable costing would be:

Multiple Choice

• $6,000 less than under absorption costing.

  Correct
• the same as absorption costing.
• $6,840 greater than under absorption costing.
• $6,840 less than under absorption costing.

Explanation

Fixed manufacturing overhead per unit = Fixed manufacturing overhead ÷ Units produced

= $142,800 ÷ 7,140 units = $20 per unit

Units in ending inventory = Units in beginning inventory + Units produced - Units sold

= 0 units + 7,140 units − 6,840 units = 300 units

Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing overhead in ending inventory − Fixed manufacturing overhead in beginning inventory = ($20 per unit × 300 unit) − $0 = $6,000

Therefore, inventory will be $6,000 less under variable costing than under absorption costing.