Exercise-4 (Variable and absorption costing ending inventory, external reports)

The production and sales data of Albari company for the year 2016 is as follows:

Variable costs per unit:

  • Direct materials: $20
  • Direct labor: $10
  • Variable manufacturing overhead: $4
  • Variable selling and administrative expenses: $8

Fixed costs per year:

  • Fixed manufacturing overhead: $180,000
  • Fixed selling and administrative expenses: $600,000

During the year 2016, Albari company manufactured 30,000 units out of which 25,000 units were sold. At the end of 2016,  the finished goods inventory account showed a balance of $170,000.

Required:

  1. What costing method is used by Albari to compute finished goods inventory?
  2. Should company use $170,000 finished goods inventory figure for external reports? if not what is the correct amount in dollars that the company should use for external reporting purpose?

Solution:

(1) Costing method used:

The ending inventory figure of $170,000 shows that the company is using variable costing for finished goods inventory because the company has not included fixed manufacturing cost in its ending inventory. The following calculation proves that:

Variable cost per unit:

exercise-4-vaac-img1

Ending inventory under variable costing: $34 × 5,000 = $170,000

(2) Finished goods inventory figure for external reports:

For external reporting purposes, company must use finished goods inventory figure computed on the basis of absorption costing system. It is computed as follows:

Absorption cost per unit:

exercise-4-vaac-img2

* $180,000/30,000 units = $6.00

Ending inventory under absorption costing: $40 × 5,000 = $200,000

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9 Comments on Exercise-4 (Variable and absorption costing ending inventory, external reports)

  1. Glen

    Hi,

    When one is doing a costing excercise for company gardens, what are the elements to take into account in order to arrive at a budget figure.

    Thanks and regards

  2. erika

    how do you get 5000 under the solution of variable costing?

    1. Zian

      Manufactured 30000-sold 25000

  3. Accounting For Management

    Out of 30,000 units manufactured, 25,000 were sold and 5,000 remained in the inventory at the end of the year. There was no beginning inventory.
    Hope this helps.

  4. karla

    how do you get the 6 in fixed overhead for Absorption cost per unit?

  5. Accounting For Management

    @karla

    Total fixed manufacturing overhead cost to manufacture 30,000 units is $180,000. So the fixed manufacturing cost per unit can be computed as follows:

    $180,000/30,000 units
    =$6.00

  6. Kwaku Frimpong

    How do I find opening inventory under absorption costing when question did give it to you.

  7. Joyline Ruaraka

    which method can i recommend to management to used? is it variable or absorption costing?

  8. Azhar Ahmed

    Hi,
    Could u please help me why selling and administrative cost pu are not considered while calculating inventory cost under variable costing further instead in calculating income under variable costing all variable cost are deducted.

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