Ibis Co's fixed production overheads were $600,000 for the year. Normal capacity is 200,000 units, but output was only 150,000 units because of a strike. Variable production cost is $7 per unit. Closing inventory is 20,000 units. What is the value of closing inventory, and how are the remaining fixed overheads treated?

Correct answer: A) $200,000; $150,000 of unallocated overhead expensed

Explanation

Fixed overheads are absorbed on the basis of normal capacity: $600,000 / 200,000 = $3 per unit. Unit cost = $7 + $3 = $10, so closing inventory = 20,000 x $10 = $200,000. Overhead absorbed by actual output = 150,000 x $3 = $450,000, and the unallocated $150,000 is expensed in the period because low production must not inflate the unit cost.