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

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

Under absorption costing, fixed factory overhead is included in the cost of each unit and is not expensed until the units are sold. To calculate ending inventory, we need to determine the total cost of goods manufactured:

Direct materials + Direct labor + Variable factory overhead + Fixed factory overhead = Total manufacturing cost per unit
$3 + $2 + $1 + ($6,000/20,000) = $3.30 per unit

Total manufacturing cost per unit x Number of units produced = Total cost of goods manufactured
$3.30 x 20,000 = $66,000

To calculate the value of ending inventory, we need to multiply the number of unsold units (2,000) by the total manufacturing cost per unit ($3.30):

$3.30 x 2,000 = $6,600

Therefore, the value of ending inventory under absorption costing is $6,600.

Last Year, Fabre Company Produced 20,000 Units and Sold 18,000