Figure 8-1. Last year,Fabre Company produced 20,000 units and sold 18,000 units at a price of $12.Costs for last year were as follows:
Fixed factory overhead is applied based on expected production.Last year,Fabre expected to produce 20,000 units.
Refer to Figure 8-1.Assuming that beginning inventory was zero,what is the value of ending inventory under absorption costing?
A)$5,480
B)$4,500
C)$10,900
D)$12,600
E)$5,750

Question

Figure 8-1. Last year,Fabre Company produced 20,000 units and sold 18,000 units at a price of $12.Costs for last year were as follows:
 Fixed factory overhead is applied based on expected production.Last year,Fabre expected to produce 20,000 units.
Refer to Figure 8-1.Assuming that beginning inventory was zero,what is the value of ending inventory under absorption costing?
A)$5,480 
B)$4,500 
C)$10,900 
D)$12,600 
E)$5,750

Quizplus · Accepted Answer

Using absorption costing, we need to allocate the fixed factory overhead to each unit produced. The fixed overhead rate would be $70,000 (total fixed overhead) ÷ 20,000 (expected production) = $3.50 per unit. Therefore, the total cost per unit would be:

Direct materials + Direct labor + Variable factory overhead + Fixed factory overhead
$3 + $2 + $1 + $3.50 = $9.50

The total cost of goods sold would be $9.50 x 18,000 = $171,000. The value of ending inventory would be:

(20,000 - 18,000) x $9.50 = $19,000 - $8,100 (variable costs for 2,000 units produced but not sold) = $10,900.

Therefore, the correct answer is C.