Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: The ending inventory for year 2 using absorption costing would be
A) $51,000
B) $34,000
C) $22,000
D) $17,000

Question

Quizplus · Accepted Answer

By using absorption costing, fixed manufacturing costs ($100,000 per year) are absorbed into the cost of each unit. 
To calculate the ending inventory for year 2 using absorption costing, we need to determine the unit product cost first:

Unit product cost = Variable manufacturing cost + Fixed manufacturing cost per unit 
Year 1: $35 + ($100,000/1,000) = $135 per unit 
Year 2: $35 + ($100,000/1,200) = $118.33 per unit

Next, we can determine the value of ending inventory for year 2:

Ending inventory = Number of units in ending inventory x Unit product cost 
Ending inventory = (1,000 - 400 + 1,200 - 1,200) x $118.33 = $34,000

Therefore, the best choice is B.

Taylor Ltd Just Finished Its Second Year of Operations