Question

For 2017, Rockford, Inc., had sales of 150,000 units and production of 200,000 units. Other information for the year included:

Direct Manufacturing labor $197,500

Variable Manufactuing overhead $100,000

direct materials $ 160,000

variable selling expenses $100,000

fixed administrative expenses $100,000

fixes manufacturing overhead $250,000

There was no begining inventory

compute the ending finished goods inventory under both absorption and varaiable costing.

Answer 1

Closing Stock = Opening Stock+ Manufactured During the Year - Sales

Closing Stock= 0+ 200000-150000 =50000 units

Under Absorption Costing-

The fixed costs are charged to all the units irrespective they are sold or not. However we note that we don't include variable selling costs and fixed selling costs in this calculations. All the fixed costs are allocated to units PRODUCED and NOT units sold.

Therefore cost statement will be as follows-

Direct Labour		$197500
variable manufacturing		$100000
Direct Materials		$160000
Fixed Manufacturing Expenses		$250000
Total Cost		$707500
Divided By : Number units produced		200000
Cost per unit		$3.5375

Closing Stock - 50000*3.5375 = $176875

Under Variable Costing-

Under Variable Costing only the direct labour, direct material and variable manufacturing costs are considered. IMPORTANT thing to note here is we don't include variable selling costs as they are expensed only when the sales happen.

Direct Labour		197500
variable manufacturing		100000
Direct Materials		160000
Total Cost		457500
Divided By : Number units produced		200000
Cost per unit		2.2875

Closing Stock - 50000*2.2875 = $114375