Question

Baylor, Inc. just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: Year 1 Year 2 Sales $40,000 $120,000 Variable cost of goods sold $22,000 $66,000 Variable selling and administration 800 22,800 2,400 68,400 Contribution margin 17,200 51,600 Fixed overhead 30,000 30,000 Fixed selling and administration 15,000 45,000 15,000 45,000 Operating income $(27,800) $ 6,600 The ending inventory for year 2 using absorption costing would be: A. $34,000 B. $51,000 C. $22,000 D. $17,000

Answer 1

Answer :

Ending inventory for year 2 under absorption costing method = A. $ 34,000

Working Notes :

1). Ending inventory in year 1 =

1000 - 400 = 600 units

2). Ending inventory units in year 2 =

Opening inventory + Units produced - units sold

= 600 units + 1,000 units -1,200 units = 400 units

3). Variable cost per unit =

Variable cost of goods sold / Units sold

= $66, 000/1,200 units = $55 per unit

4). Fixed overhead per unit =

Fixed overhead / units produced

= 30,000/ 1,000 = $30

5). Cost under absorption costing =

Variable cost per unit + Fixed overhead per unit = $55 + $30 = $85 per unit

6). Ending inventory under absorption costing =

$85 * 400 units = $34,000