Question

1.) During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials, $7 per unit, Direct labor, $5 per unit, Variable overhead, $6 per unit, and Fixed overhead, $270,000. The company produced 27,000 units, and sold 18,500 units, leaving 8,500 units in inventory at year-end. What is the value of ending inventory under absorption costing?

2.) Kluber, Inc. had net income of $915,000 based on variable costing. Beginning and ending inventories were 56,500 units and 55,000 units, respectively. Assume the fixed overhead per unit was $2.00 for both the beginning and ending inventory. What is net income under absorption costing?

Answer 1

1) Absorption cost per unit

Direct material	7
Direct labour	5
Variable overhead	6
Fixed overhead ( 270,000/27,000)	10
Absorption cost per unit	28

Value of Ending inventory = 8,500 x 28 = 238,000

2) net income under absorption costing

Net income under variable costing	915,000
Less: fixed manufacturing cost deferred in inventory ( 1,500 x 2)	3,000
Net income under absorption costing	912,000