#7
Inventory Valuation under Absorption Costing and Variable Costing
At the end of the first year of operations, 5,000 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows:
Direct materials | $29.80 | |
Direct labor | 17.20 | |
Fixed factory overhead | 5.60 | |
Variable factory overhead | 4.90 |
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.
Absorption costing | $ |
Variable costing | $ |
Answer a.
Unit Product Cost = Direct Materials + Direct Labor + Fixed
Factory Overhead + Variable Factory Overhead
Unit Product Cost = $29.80 + $17.20 + $5.60 + $4.90
Unit Product Cost = $57.50
Cost of Ending Inventory = Unit Product Cost * Number of units
in ending inventory
Cost of Ending Inventory = $57.50 * 5,000
Cost of Ending Inventory = $287,500
Answer b.
Unit Product Cost = Direct Materials + Direct Labor + Variable
Factory Overhead
Unit Product Cost = $29.80 + $17.20 + $4.90
Unit Product Cost = $51.90
Cost of Ending Inventory = Unit Product Cost * Number of units
in ending inventory
Cost of Ending Inventory = $51.90 * 5,000
Cost of Ending Inventory = $259,500
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