Crossbow Corp. produces a single product. Data concerning June's operations follow: Under absorption costing, ending inventory on the balance sheet would be valued at:
A)$10,000
B)$7,000
C)$9,000
D)$12,000

Question

Crossbow Corp. produces a single product. Data concerning June's operations follow:  Under absorption costing, ending inventory on the balance sheet would be valued at:
A)$10,000 
B)$7,000 
C)$9,000 
D)$12,000

Quizplus · Accepted Answer

Under absorption costing, ending inventory includes all the manufacturing costs, including fixed manufacturing overhead. 
Ending inventory value = (Unit product cost x Number of units in ending inventory)
In June, the unit product cost under absorption costing is
Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead per unit
= $60 + $20 + $6 + ($30,000 ÷ 10,000 units)  
= $96 per unit
Therefore, the value of the ending inventory would be:
$96 x 1000 units = $96,000
But, the total manufacturing cost incurred during June was: 
Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead 
= $600,000 + $200,000 + $60,000 + $30,000 
= $890,000
Thus, cost of goods sold for June:
Cost of goods available for sale - Ending inventory value
= $890,000 - $96,000
= $794,000
Therefore, the ending inventory on the balance sheet would be valued at $9,000 (Option C).