Question

Inventory Valuation under Absorption Costing and Variable Costing

At the end of the first year of operations, 5,100 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows:

Direct materials	$40.90
Direct labor	15.10
Fixed factory overhead	7.00
Variable factory overhead	6.20

Determine the cost of the finished goods inventory reported on the balance sheet under (a) the absorption costing concept and (b) the variable costing concept.

Answer 1

Req a:
Unit cost as per Absorption Costing:
Direct Material		40.90
Direct labour		15.10
Variable Factory OH		6.20
Fixed Factory OH		7.00
Unit cost as per Absorption Costing:		69.20
Ending Inventory as per Absorption costing;
Number of units in inventory				5100
Cost per unit				69.2
Ending Inventory as per Absorption costing;				352920
Req b:
Unit cost as per Variable Costing:
Direct Material		40.9
Direct labour		15.1
Variable Factory OH		6.2
Unit cost as per Vvariable Costing:		62.2
Ending Inventory as per Variable costing;
Number of units in inventory				5100
Cost per unit				62.2
Ending Inventory as per Variable costing;				317220