Charlie Stumpf manufactures and sells high-quality, handmade wooden toys. Charlie began the current year with zero inventories. During the year, Charlie produced toys that consumed $24,000 in materials and $30,000 in labor. At year-end, Charlie estimated that his inventory comprised toys that had $5,000 of materials content and $7,500 of labor content. Based on his actual fixed manufacturing overhead costs, Charlie added overhead to products at the rate of 100% of labor cost.

Required:
a. What is the value of Charlie’s ending inventory under absorption costing?
b. Repeat requirement (a) assuming that Charlie allocates overhead to products using material cost, rather than labor cost, as the allocation basis.
c. Which of the two allocation bases, labor cost or materials cost, will cause Charlie to report higher income for the year? Why?