Krepps Corporation produces a single product. Last year, Krepps manufactured 20,000 units and sold 15,000 units. Production costs for the year were as follows: Sales totaled $825,000 for the year, variable selling and administrative expenses totaled $108,000, and fixed selling and administrative expenses totaled $165,000. There was no beginning inventory. Assume that direct labor is a variable cost.Under absorption costing, the ending inventory for the year would be valued at:
A) $0
B) $216,000
C) $248,250
D) $180,000

Question

Krepps Corporation produces a single product. Last year, Krepps manufactured 20,000 units and sold 15,000 units. Production costs for the year were as follows:  Sales totaled $825,000 for the year, variable selling and administrative expenses totaled $108,000, and fixed selling and administrative expenses totaled $165,000. There was no beginning inventory. Assume that direct labor is a variable cost.Under absorption costing, the ending inventory for the year would be valued at:
A) $0 
B) $216,000 
C) $248,250 
D) $180,000

Quizplus · Accepted Answer

Under absorption costing, the ending inventory includes both variable and fixed manufacturing costs. The total manufacturing cost per unit is $47 ($9 + $20 + $18) per unit. Therefore, the total cost of producing all 20,000 units is $940,000. The cost of goods sold is $660,000 ($44 x 15,000 units sold). The ending inventory is the cost of the remaining 5,000 units, which is $280,000 ($47 x 5,000 units). However, we need to subtract the fixed manufacturing overhead from the ending inventory since it is not expensed until the units are sold. The fixed manufacturing overhead rate is $4.50 per unit ($90,000 / 20,000 units). Therefore, the ending inventory valued under absorption costing is $180,000 ($280,000 – ($4.50 x 5,000 units)).

Krepps Corporation Produces a Single Product