Roy Corporation produces a single product. During July, Roy produced 10,000 units. Costs incurred during the month were as follows: Under absorption costing, any unsold units would be carried in the inventory account at a unit product cost of:
A)$5.10
B)$4.40
C)$3.80
D)$3.50

Question

Roy Corporation produces a single product. During July, Roy produced 10,000 units. Costs incurred during the month were as follows:  Under absorption costing, any unsold units would be carried in the inventory account at a unit product cost of:
A)$5.10 
B)$4.40 
C)$3.80 
D)$3.50

Quizplus · Accepted Answer

Under absorption costing, both fixed and variable manufacturing costs are included in the unit product cost. The total cost incurred during the month is $65,000, and the total number of units produced is 10,000, so the unit product cost is $6.50 ($65,000 ÷ 10,000). Since there were no units sold during the month, all 10,000 units produced would be carried in inventory. Therefore, the unsold units would be carried in inventory at a unit product cost of $6.50. However, since fixed manufacturing overhead is a period cost and should not be included in the cost of unsold inventory, the unit product cost for inventory valuation purposes should only include variable manufacturing costs, which is $2.10 per unit ($21,000 ÷ 10,000). Therefore, the correct unit product cost for unsold inventory under absorption costing is $6.50 - $2.10 = $4.40.

Roy Corporation Produces a Single Product