Question

A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (17,700 units): Direct materials $182,500 Direct labor 234,900 Variable factory overhead 254,900 Fixed factory overhead 96,300 $768,600 Operating expenses: Variable operating expenses $130,100 Fixed operating expenses 45,900 176,000 If 1,600 units remain unsold at the end of the month, the amount of inventory that would be reported on the absorption costing balance sheet is

Answer 1

Answer:

Value of closing inventory = $69,478

Explanation:

Since the capacity is 100% utilized, therefore rate of absorption will be based accordingly.

Under absorption costing only manufacturing costs form part of cost of goods, and not the operating expenses which include, selling and distribution or administrative.

Therefore cost of goods produced =

Variable = Direct materials $182,500 + Direct labor 234,900 + Variable factory overhead 254,900 = $672,300

Fixed = Fixed factory overhead 96,300 = $96,300

Total manufacturing cost = $672,300 + $96,300 = $768,300

Number of units produced = 17,700

Cost per unit = $768,300 / 17,700 = $43.424

Value of closing inventory = $43.424 $\times$ 1,600 units = $69,478