Question

This year Amber purchased a factory to process and package landscape mulch. Approximately 20 percent of management time, space, and expenses are spent on this manufacturing process. At the end of the year, Amber’s accountant indicated that the business had processed 10 million bags of mulch but only 1 million bags remained in the ending inventory. What is Amber’s tax basis in her ending inventory if the UNICAP rules are used to allocate indirect costs to inventory? (Assume direct costs are allocated to inventory according to the level of ending inventory. In contrast, indirect costs are first allocated by time spent and then according to level of ending inventory.) (Round your answers to 2 decimal places. Leave no answers blank. Enter zero if applicable.)

Answer 1

The costs of selling, advertising, and research are not required to be allocated to inventory under UNICAP. Direct costs (material, labor, taxes, and depreciation) are allocated to inventory according to the level of ending inventory (10%). In contrast, indirect costs (administration) are first allocated by time spent (20%) and then according to the level of ending inventory.

Costs Tax Inventory

Material: Mulch and packaging $ 5,000 $ 500
Administrative supplies 250 5
Salaries: Factory labor $12,000 1,200
Sales & advertising 3,500 0
Administration 5,200 104
Property taxes: Factory $ 4,600 460
Offices 2,700 54
Depreciation: Factory $ 8,000 800
Offices 1,500 30