During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials, $5 per unit, Direct labor, $3 per unit, Variable overhead, $4 per unit, and Fixed overhead, $250,000. The company produced 25,000 units, and sold 20,000 units, leaving 5,000 units in inventory at year-end. What is the value of ending inventory under absorption costing?
A) $60,000
B) $110,000
C) $50,000
D) $250,000

Question

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs are included in the cost of goods sold, including fixed overhead. Therefore, to calculate the value of ending inventory, we need to allocate fixed overhead to each unit produced.

The total manufacturing cost per unit under absorption costing is:

$5 (direct materials) + $3 (direct labor) + $4 (variable overhead) + ($250,000/25,000 units) = $22 per unit

The value of ending inventory is:

5,000 units x $22 per unit = $110,000

Therefore, the best choice is B, $110,000.

During Its First Year of Operations, the McCormick Company Incurred