Inventory Valuation under Absorption Costing and Variable Costing At the end of the first year of operations, 21,500 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows: Direct materials $30 Direct labor 18 Fixed factory overhead 22 Variable factory overhead 14 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.

Absorption Costing accounts for the full costs including fixed costs for inventory evaluation whereas Variable Costing only accounts for variable Costs.

Variable Costing Absorption Costing

Materials $ 30 $30

Labor 18 18

FOH

Variable 14 14

Fixed ------- 22

Total Manufacturing Costs 62 84

Ending F. Goods Units 21,500 21,500

Total Costs $ 1333000 $ 1806000

Absorption Costing = Direct materials $30+ Direct labor 18+ Fixed factory overhead 22+ Variable factory overhead 14 = $ 84

Variable Costing =Direct materials $30 + Direct labor 18 +Variable factory overhead 14 = $ 62

andromache andromache · Answer 2 · 2022-03-10T12:29:57+01:00

a. The cost of finished goods inventory under the concept of absorption costing should be $1,806,000.

b. The cost of finished goods inventory under the variable costing concept should be $1,333,000

Calculation of the cost of finished goods inventory:

a. Under the absorption costing:

= (30+18+22+14)*21500

= $1,806,000

b. Under the variable costing

= (30+18+14)*21500

= $1,333,000

Also, the only difference between variable costing and absorption costing should be because of the fixed manufacturing overhead is absorbed since a product cost should be charged under absorption costing while on the other hand, it is charged as a period cost under variable costing

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