OMG Company manufactures sports cars. During the last quarter of 2025, it produced 12,000 units and sold 9,000 units. The company has a building, of which 60% is used for manufacturing and 40% for administration, marketing, and sales. The quarterly depreciation for the building is $1,000,000. Assume that the actual manufacturing overhead cost equals the applied manufacturing overhead cost.

The amount of the building-related depreciation classified as an asset is:

Question

OMG Company manufactures sports cars. During the last quarter of 2025, it produced 12,000 units and sold 9,000 units. The company has a building, of which 60% is used for manufacturing and 40% for administration, marketing, and sales. The quarterly depreciation for the building is $1,000,000. Assume that the actual manufacturing overhead cost equals the applied manufacturing overhead cost.

The amount of the building-related depreciation classified as an asset is:

BlackTom AI · Accepted Answer

Under absorption costing, manufacturing-related depreciation is capitalized as part of inventory (a product cost); nonmanufacturing (administrative/marketing/sales) depreciation is a period expense.

1) Relevant concepts
- Product costs (direct materials, direct labor, manufacturing overhead) are included in inventory (an asset) until goods are sold.
- Period costs (SG&A, administrative) are expensed immediately.
- When overhead is applied at actual = applied, we allocate the building depreciation between manufacturing and nonmanufacturing by space usage then prorate across units produced.

2) Step-by-step reasoning and calculations
Step 1 — Allocate total building depreciation:
- Total quarterly depreciation = $1,000,000.
- Manufacturing portion (60%) = 1,000,000 × 0.60 = $600,000.
- Nonmanufacturing portion (40%) = 1,000,000 × 0.40 = $400,000 (this $400,000 is expensed immediately as period cost).

Step 2 — Determine per-unit manufacturing depreciation:
- Units produced = 12,000.
- Manufacturing depreciation per unit = $600,000 ÷ 12,000 = $50 per unit.

Step 3 — Determine how much of that manufacturing depreciation remains as an asset (inventory):
- Units sold = 9,000 → units in ending inventory = 12,000 − 9,000 = 3,000.
- Depreciation capitalized in inventory = 3,000 × $50 = $150,000.

Step 4 — (For completeness) Depreciation charged to cost of goods sold = 9,000 × $50 = $450,000.

3) Why the correct answer is correct
Because only the manufacturing portion of depreciation becomes part of product cost, and only the portion assigned to units still in inventory at quarter-end remains classified as an asset. That calculation yields $150,000.

4) Why other choices are incorrect
- $600,000: total manufacturing depreciation, but most was allocated to COGS for units sold; not all is an asset.
- $400,000: nonmanufacturing depreciation — this is a period expense, not an asset.
- $0: incorrect because some produced units (3,000) remain in inventory and carry a portion of the manufacturing depreciation.
- “None of the answer is correct.”: incorrect because $150,000 is the correct computed amount.

Conclusion: The amount of the building-related depreciation classified as an asset is $150,000, which matches the provided answer.

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