An Entity Starts Production of a New Product and After

question 8

Multiple Choice

An entity starts production of a new product and after selling 2,000 units has closing inventory of 5,000 units.Normal operating capacity is 8000 units.Direct material costs are €3 per unit,direct labour costs are €2 per unit & variable overhead is €1 per unit.Fixed production overhead is €40,000,sales overhead is €30,000 & general overhead is €20,000.What is the value of closing inventory under IAS 2?

• A)€72,860
• B)€67,500
• C)€58,571
• D)€55,000

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Definitions:

Owner's Equity

The residual interest in the assets of an enterprise after deducting its liabilities; represents the owner's claims against the company's assets.

Income Summary

An account to which the revenues and expenses are transferred in order to calculate the net income for the period, ultimately transferring to retained earnings.

Accounting Cycle

The series of steps followed by an entity to collect, process, and report financial information, culminating in the preparation of financial statements for a specific period.

Adjusting Entry

Documentation produced at a period's end within accounting to properly allocate profits and outlays to the actual period they happened.