Under variable costing, which of the following costs would be included in finished goods inventory?

• A. All manufacturing and non-manufacturing costs
• B. Direct materials, direct labor, variable and fixed manufacturing overhead
• C. Direct materials, direct labor, and variable manufacturing overhead
• D. Direct materials and direct labor only

Answer: (C)

Verified step by step guidance

1. Understand the concept of variable costing: Variable costing includes only variable manufacturing costs in the cost of finished goods inventory. Fixed manufacturing overhead is treated as a period cost and is not included in inventory under this method.
2. Identify the components of variable manufacturing costs: These typically include direct materials, direct labor, and variable manufacturing overhead. Fixed manufacturing overhead and non-manufacturing costs are excluded.
3. Analyze the options provided: Evaluate each option to determine which costs align with the principles of variable costing. For example, 'All manufacturing and non-manufacturing costs' would not be correct because non-manufacturing costs are excluded.
4. Focus on the correct answer: The correct answer is 'Direct materials, direct labor, and variable manufacturing overhead,' as these are the costs included in finished goods inventory under variable costing.
5. Review the exclusions: Fixed manufacturing overhead and non-manufacturing costs are treated differently under variable costing, ensuring clarity on what is excluded from inventory.