A manufacturer reports the following costs to produce 28,000 units in its first year of operations: Direct materials, $28 per unit, Direct labor, $24 per unit, Variable overhead, $280,000, and Fixed overhead, $364,000. Of the 28,000 units produced, 27,000 were sold, and 1,000 remain in inventory at year-end. Under absorption costing, the value of the inventory is:

In absorption costing, the cost of every unit produced is worked out by adding up the direct cost of materials, direct labor, variable overhead, and the fixed overhead. Unlike in the case of marginal costing where the fixed cost is treated as period cost, in absorption costing, fixed cost is treated as a product cost.

The cost per unit

$

Direct material 28

Direct labor 24

Variable overhead 10

Fixed cost 13

Cost per unit 75

Cost of Inventory

Number of units = 1000

Cost per unit = $75

Value = 1000 * $75 = $75,000

Workings:

Variable overhead per unit = [tex]\frac{Total variable cost}{Number of units} =\frac{280000}{28000} = 10[/tex]

Fixed cost per unit =[tex]\frac{Total fixed cost}{number of units} =\frac{364,000}{28,000} = 13[/tex]