Question

As a result of a downturn in the economy, Optiplex Corporation has excess productive capacity. On January 1, 2010, Optiplex signed a special order contract to manufacture custom-design generators for a new customer. The customer requests that the generators be ready for pick up by March 15, 2010 and guarantees it will take possession of the generators by April 15, 2010. Optiplex incurred the following direct costs related to the custom-design generators:

Cost to complete the design of the generators $ 3,000
Purchase price for materials and parts 80,000
Transportation cost to get materials and parts to manufacturing facility 2,000
Direct labor (10,000 labor hours at $12 per hour) 120,000
Cost to store finished product (from March 15 to March 30) 2,000

Because of the company’s inexperience in manufacturing generators of this design, the cost of materials and parts included an abnormal amount of waste totaling $5,000.
In addition to direct costs, Optiplex applies variable and fixed overhead to inventory using predetermined rates. The variable overhead rate is $2 per direct labor hour. The fixed overhead rate based on a normal level of production is $6 per direct labor hour. Given the decreased level of production expected in 2010, Optiplex estimates a fixed overhead application rate of $9 per direct labor hour in 2010.

Required: Determine the amount at which the inventory of custom-design generators should be reported on Optiplex Corporation’s March 30, 2010 balance sheet under IFRS.

Answer 1

The inventory of custom-design generators should be reported on Optiplex Corporation’s March 30, 2010 balance sheet under IFRS at a cost of $312,000.

Step-by-step explanation:

To determine the amount at which the inventory of custom-design generators should be reported on Optiplex Corporation’s March 30, 2010 balance sheet under IFRS, we need to calculate the total product cost by adding all direct and indirect costs that are attributable to the production of the generators.

The direct costs provided are:

• Design of the generators: $3,000
• Materials and parts: $80,000
• Transportation for materials: $2,000
• Direct labor: $120,000 (10,000 hours at $12/hour)
• Cost of storage: $2,000

Additionally, there was an abnormal waste cost included in the materials and parts: $5,000

For overhead costs, we have:

• Variable overhead: $2 per direct labor hour
• Fixed overhead for 2010: $9 per direct labor hour
• Variable overhead totals: 10,000 hours x $2/hour = $20,000
• Fixed overhead totals: 10,000 hours x $9/hour = $90,000

Summing all these costs, excluding the abnormal waste as it should not be included in the inventory valuation:

Total Cost = Direct costs (excluding abnormal waste) + Variable overhead + Fixed overhead

Total Cost = ($3,000 + $80,000 + $2,000 + $120,000 + $2,000) + $20,000 + $90,000 - $5,000 (abnormal waste)

Total Cost = $207,000 + $20,000 + $90,000 - $5,000

Total Cost = $312,000

The inventory of custom-design generators should be reported at $312,000 on the balance sheet as of March 30, 2010.