McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 11

This year Amber opened a factory to process and package landscape mulch.At the end of the year, Amber's accountant prepared the following schedule for allocating manufacturing costs to the mulch inventory, but her accountant is unsure of what costs need to be allocated to the inventory under UNICAP.Approximately 20 percent of management time, space, and expenses are spent on this manufacturing process.
a.At the end of the year, Amber's accountant indicated that the business had processed 10,000 bags of mulch but only 1,000 bags remained in the ending inventory.What is Amber's tax basis in her ending inventory after applying the UNICAP rules to allocate indirect costs to inventory? (Assume direct costs are allocated to inventory according to the level of ending inventory.In contrast, indirect costs are first allocated by time spent and then according to level of ending inventory.
b.Under what conditions could Amber's business avoid having to apply UNICAP to allocate indirect costs to inventory for tax purposes?