Valyn Corporation’s total fixed costs expensed this year on the absorption costing basis were
Fixed selling expenses 7.00 980,000 980,000
Fixed administrative expenses 3.00 420,000 425,000
Sales in units 140,000 125,000
Production in units 140,000 130,000
Fixed manufacturing overhead 5.00
Fixed manufacturing overhead 700,000 715,000
Beginning finished goods inventory in units 35,000
- Answer (C) is correct.
- Under the absorption method, all selling and administrative fixed costs are charged to the current period. Accordingly, $980,000 of selling expenses and $425,000 of actual fixed administrative expenses were expensed during the year.
The fixed manufacturing costs must be calculated after giving consideration to the increase in inventory during the period (some fixed costs were capitalized) and to the underapplied overhead. The beginning finished goods inventory included 35,000 units, each of which had absorbed $5 of fixed manufacturing overhead. Each unit produced during the year also absorbed $5 of fixed manufacturing overhead. Given that 125,000 of those units were sold, cost of goods sold was debited for $625,000 of fixed overhead (125,000 units × $5).
At year end, the underapplied overhead was also added to cost of goods sold. Because production was expected to be 140,000 units, the overhead application rate for the $700,000 of planned fixed manufacturing overhead was $5 per unit. Only 130,000 units were manufactured. Hence, $650,000 (130,000 units × $5) of overhead was applied to units in process. Because inventory increased from 35,000 to 40,000 units (35,000 BI + 130,000 produced – 125,000 sold), $25,000 (5,000-unit increase × $5) of the applied fixed manufacturing overhead for the period was inventoried, not expensed.
Actual overhead was $715,000, so the underapplied overhead was $65,000 ($715,000 – $650,000). This amount was charged to cost of goods sold at year end.
The total of the fixed costs expensed was therefore $2,095,000 ($980,000 selling expenses + $425,000 administrative expenses + $625,000 standard manufacturing overhead costs of units sold + $65,000 underapplied overhead).