At the start of the year, Finished good Goods Inventory=$1,000,000. At the end of the year, the...

Question:

At the start of the year, Finished good Goods Inventory=$1,000,000. At the end of the year, the company had a Finished Good Inventory=$1,400,000. During the year, the company incurred $400,000 of depreciation expense on its manufacturing equipment. How much depreciation expense will be in Finished Goods Inventory under variable costing? Show work and explain.

Variable Costing:

Variable costing is a method of calculating and reporting manufacturing costs and revenues used by manufacturers for internal reporting. It cannot be used for external reporting as the accounting standards require the use of full or absorption costing.

Answer and Explanation:


The value of ending inventory under variable costing is determined by adding up all the VARIABLE manufacturing costs for the period and dividing the total between the number of units sold and the number of units in ending inventory.

Fixed manufacturing costs are expensed in the period they are incurred and not used in the calculation of the value of ending inventory.

Depreciation is a fixed manufacturing cost, so under variable costing the $400,000 would be expensed in the income Statements and $0 will be in Finished Goods inventory.


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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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