Inventory Valuation under Absorption Costing and Variable Costing At the end of the first year of operations, 4,800 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows:

Direct materials $30.70

Direct labor 19.80

Fixed factory overhead 5.20

Variable factory overhead 4.60

Determine the cost of the finished goods inventory reported on the balance sheet under (a) the absorption costing concept and (b) the variable costing concept.

Answer: The cost of the inventory reported in the balance sheet according to:

A. The concept of absorption costing is 289440.

B. The concept of variable costing is 264480.

Explanation: A. The concept of absorption costing charges to the cost of finished products: direct materials, direct labor, factory fixed overhead and factory variable overhead. We must calculate the cost of inventory by multiplying the number of units produced by unit manufacturing costs.

Direct materials: 4800 x $ 30.70 = 147360

Direct Labor: 4800 x $ 19.80 = 95040

Factory fixed overhead: 4800 x $ 5.20 = 24960

Factory variable overhead: 4800 x $ 4.60 = 22080

The total sum = 147360 + 95040 + 24960 + 22080 = 289440 is the inventory cost reported in the balance sheet.

B. The concept of variable costing charges only the variable elements at the cost of finished products: direct materials, direct labor and variable factory overhead. We must calculate the cost of inventory by multiplying the number of units produced by unit manufacturing costs:

Direct materials: 4800 x $ 30.70 = 147360

Direct Labor: 4800 x $ 19.80 = 95040

Factory variable overhead: 4800 x $ 4.60 = 22080

The total sum = 147360 + 95040 + 22080 = 264480 is the inventory cost that is reported in the balance sheet.