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 = $ 84

Absorption Ending F. Goods$  1806000  

Variable Costing =$ 62

Variable Ending F. Goods  $ 1333000  

Explanation:

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

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