The St Godwen Wine Cooperative runs a vineyard and winery. The direct costs of producing one bottle of wine are £5.50. The expected level of production in a year is 250,000 bottles of wine. In the year ended 31 January 2020, only 200,000 bottles of wine were produced due to unfavourable weather conditions in the summer of 2019. Fixed production costs for the year total up to £450,000. At 31 January 2020, the St Godwen Wine Cooperative has 20,000 bottles of wine from the 2019 vintage in its cellars. What is the total value of this wine on an absorption costing basis?

Question

Quizplus · Accepted Answer

Under absorption costing, both variable and fixed production costs are included in the cost of inventory. The direct cost per bottle is £5.50. The fixed production cost per bottle is £450,000 / 250,000 = £1.80. Therefore, the total cost per bottle is £5.50 + £1.80 = £7.30. The value of 20,000 bottles is 20,000 * £7.30 = £146,000.

The St Godwen Wine Cooperative Runs a Vineyard and Winery