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ACCA Applied Skills · Financial Reporting · Inventories and agriculture

Dalton Co manufactures a single product. Variable production costs are $18 per unit. Fixed production overheads are $240,000 per year, based on normal capacity of 40,000 units. In the year, 30,000 units were produced, 25,000 were sold and none was in opening inventory. What is the value of closing inventory under IAS 2?

Closing inventory is $120,000. Under IAS 2 fixed overheads are absorbed at normal capacity, giving $6 per unit, so unit cost is $24. Five thousand units remain unsold, giving $120,000. Using actual output would wrongly raise the overhead rate to $8.

  1. A$90,000Correct
  2. B$120,000
  3. C$150,000
  4. D$105,000

Explanation

Fixed overhead absorption is $240,000/40,000 = $6 per unit, not based on the lower actual output of 30,000 (which would give $8). Cost per unit = 18 + 6 = $24. Closing inventory is 5,000 units x $24 = $120,000.

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