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This problem does not specify whether Valyn is using a standard cost system (in which standard, or planned, costs are used to account for production) or an actual cost system (in which actual costs are used). However, it does say that Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product. And since the actual, incurred per unit costs for direct materials, direct labor and variable manufacturing overhead are exactly the same as the planned per unit costs for those items, we do not need to know whether standard costing or actual costing is being used in order to answer this question. Under variable costing, the cost per unit in ending inventory was $25 ($12 direct materials per unit + $9 direct labor per unit + $4 variable manufacturing overhead per unit). Fixed manufacturing cost per unit is not included, since under variable costing, fixed manufacturing cost is expensed as incurred. Given an ending inventory of 40,000 units, the value of ending inventory was $1,000,000 (40,000 units × $25 per unit).
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This answer results from incorrectly calculating ending inventory as 30,000 units. Ending inventory is beginning inventory plus production minus sold units, which is 40,000 units.
This answer results from including variable selling and variable administrative expenses as inventoriable costs. Only variable product costs are inventoriable costs on the variable costing basis, and selling and administrative expenses are not product costs.