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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Yates Company shows the following unit costs for its product:

Chapter 3, Problem 14MCQ, Yates Company shows the following unit costs for its product: Yates started the year with 8,000

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

  1. a. greater under variable costing than absorption costing.
  2. b. greater under absorption costing than variable costing.
  3. c. the same under both variable and absorption costing.
  4. d. There is no ending inventory.
  5. e. This situation cannot happen.

To determine

Identify ending inventory of company Y.

Explanation

Absorption costing

Under absorption costing method, manufacturing cost such as direct material and labor are assigned to the product. Fixed overhead is treated as cost of the product.

Fixed overheads are not included while computing ending inventory under variable costing.

b.

Compute ending inventory as shown below:

Endinginventoryunits=Beginninginventory+unitsproducedunitssold=8,000+50,00055,000=3,000units

Compute unit cost using absorption costing method as shown below:

ParticularsAmount ($)
Direct material40
Add: 
Direct Labor30
Variable overhead2
Fixed overhead5
Unit product cost77

Now compute ending inventory under absorption costing as shown below:

Valueofendinginventory=(Endinginventoryunits×Absorptionunitproductcost)=3,000units×$77=$231,000

Ending inventory is $231,000 under absorption costing

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