5. Inventory Valuation under Absorption Costing and Variable Costing

At the end of the first year of operations, 6,800 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows:

Direct materials	$29.50
Direct labor	15.40
Fixed factory overhead	7.40
Variable factory overhead	6.50

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	$
Variable costing	$

6. Variable Costing Income Statement

The following data were adapted from a recent income statement of Bluth Company:

	(in millions)
Sales	$218,210
Operating costs:
Cost of products sold	$104,740
Marketing, administrative, and other expenses	69,830
Total operating costs	$174,570
Income from operations	$43,640

Assume that the variable amount of each category of operating costs is as follows:

			(in millions)
Cost of products sold			$58,920
Marketing, administrative, and other expenses			28,370

a. Based on the data given, prepare a variable costing income statement for Bluth Company, assuming that the company maintained constant inventory levels during the period.

Bluth Company
Variable Costing Income Statement (assumed)
(in millions)
		$
		$
		$
Fixed costs:
	$
		$

b. If Bluth Company reduced its inventories during the period, what impact would that have on the income from operations determined under absorption costing?

If Bluth Company reduced its inventories during the period, then the cost of products sold would fixed costs allocated to the beginning inventories. Thus, the total fixed costs of products sold on the absorption costing income statement would be , and the income from operations would be .