A business operated at 100% of capacity during its first month and incurred the following costs: If 600 units remain unsold at the end of the month, what is the amount of inventory that would be reported on the absorption costing balance sheet?
A) $24,300
B) $28,200
C) $22,800
D) $34,000

Question

A business operated at 100% of capacity during its first month and incurred the following costs:  If 600 units remain unsold at the end of the month, what is the amount of inventory that would be reported on the absorption costing balance sheet?
A) $24,300 
B) $28,200 
C) $22,800 
D) $34,000

Quizplus · Accepted Answer

The amount of inventory on the balance sheet under absorption costing includes all manufacturing costs incurred up to the point of sale, including fixed production costs. 
Total manufacturing cost per unit = $25 + $30 + $10 + $5 = $70/unit
Total cost of goods manufactured (COGM) = 1000 units × $70/unit = $70,000
If 600 units remain unsold, then the cost of goods sold (COGS) would be 400 units × $70/unit = $28,000
The ending inventory under absorption costing would be 600 units × $70/unit = $42,000
However, since the question asks for the amount of inventory reported on the balance sheet, we need to deduct the fixed production costs that are not expensed until the products are sold. 
Fixed production costs per unit = $15 + $8 + $2 = $25/unit
Fixed production costs in ending inventory = 600 units × $25/unit = $15,000
Ending inventory under absorption costing = $42,000 - $15,000 = $27,000 or $22,800 rounded to the nearest dollar.

A Business Operated at 100% of Capacity During Its First