Question

At Exodus Inc., 40,000 units are produced and 30,000 units are sold for a total of $720,000 in the first year of operations, resulting in operating income of $240,000. Fixed manufacturing costs are $120,000 and administrative costs are $80,000. Given this, the cost of the ending finished goods inventory under the absorption costing approach is

Answer 1

Number of units produced = 40,000

Number of units sold = 30,000

Ending inventory = Number of units produced- Number of units sold

= 40,000-30,000

= 10,000

Fixed manufacturing cost = $120,000

Fixed manufacturing cost included in cost of goods sold = Fixed manufacturing cost /Number of units sold/Number of units produced

= 120,000 x 30,000/40,000

= $90,000

Sales = $720,000

Operating income = $240,000

Administrative costs= $80,000

Variable cost of goods sold = ?

Operating income = Sales - Variable cost of goods sold - Fixed manufacturing cost included in cost of goods sold- Administrative costs

240,000 = 720,000-Variable cost of goods sold - 90,000-80,000

Variable cost of goods sold = $310,000

Variable cost of goods sold per unit = Total variable cost of goods sold/Number of units sold

=310,000/30,000

= $10.3333

Variable manufacturing costs of ending inventory = Ending inventory x  Variable cost of goods sold per unit

= 10,000 x 10.3333

= $103,333

Fixed manufacturing costs of ending inventory = $30,000

Cost of ending inventory = Variable manufacturing costs of ending inventory+Fixed manufacturing costs of ending inventory

= 103,333+30,000

= $133,333

the cost of the ending finished goods inventory under the absorption costing approach is $103,333.