Question

Obama Company sells its product for $29 per unit. During 2020, it produced 27500units and sold 20000 units (there was no beginning inventory). Costs per unit are: direct materials $6, direct labour $5, and variable overhead $4. Fixed costs are: $330000 manufacturing overhead, and $55000 selling and administrative expenses. Under absorption costing, what amount of fixed overhead is deferred to a future period?

$82500 $90000 $240000 $330000

Answer 1

Number of unis produced = 27,500

Number of units sold = 20,000

Ending inventory = Number of unis produced -Number of units sold

= 27,500-20,000

= 7,500

Direct materials = $6 per unit

Direct labor = $5 per unit

Variable overhead = $4 per unit

Fixed manufacturing overhead = $330,000

Fixed manufacturing overhead in ending inventory = Fixed manufacturing overhead x Ending inventory/ Number of units produced

= 330,000 x 7,500/27,500

= $90,000

Hence, fixed overhead is deferred to a future period = $90,000

Second option is correct.