Question

#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 1

Solution :

Unit product cost under absorption costing = Direct materials + Direct labor + Fixed factory overhead + Variable factory overhead = $29.80 + $17.20 + $5.60 + $4.90 = $57.50

Nos of units in finished goods inventory = 5000 units

Cost of finished goods inventory to be reported in under absorption costing =5000 * $57.50 = $287,500

Unit product cost under variable costing = $29.80 + $17.20 + $4.90 = $51.90

Cost of finished goods inventory to be reported under variable costing = 5000 * $51.90 = $259,500