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This answer results from multiplying $5 fixed manufacturing overhead by 130,000 units produced and adding the product to actual fixed selling and fixed administrative expenses. This is incorrect for two reasons: (1) The problem says that any over- or under-applied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the reporting year. This answer omits that adjustment. (2) The fixed manufacturing cost expensed should be the $5 per unit fixed manufacturing cost multiplied by the number of units sold , not the number of units produced.
This problem does not specify whether Valyn is using a standard cost system (in which standard, or planned, costs are used to account for production) or an actual cost system (in which actual costs are used). However, it does say that Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product. And since the actual, incurred per unit costs for direct materials, direct labor and variable manufacturing overhead are exactly the same as the planned per unit costs for those items, we do not need to know whether standard costing or actual costing is being used in order to answer this question. Under absorption costing, the per unit cost of inventory includes all production costs, both fixed and variable. These costs are applied to each unit as it is produced, and the costs go into inventory until the units the costs are attached to are sold. When the units are sold, the costs attached to each sold unit are expensed. The difference between the actual incurred costs and the applied costs for fixed manufacturing overhead is a variance, also called under-applied or over-applied costs. The problem says that this variance is closed out at the end of the period by debiting or crediting the whole amount to cost of goods sold. Thus, for each unit that is sold, $5 of fixed manufacturing overhead is expensed as cost of goods sold. 125,000 units were sold, so this is $625,000 fixed manufacturing costs in cost of goods sold related to the units sold. Since under- or over-applied overhead is allocated to cost of goods sold, we need to calculate the amount of the under- or over-applied overhead. A total of $650,000 of fixed overhead was applied during the period (130,000 units produced at $5 fixed manufacturing cost per unit). The actual fixed overhead was $715,000, so fixed overhead was under-applied by $65,000. This $65,000 of under-applied overhead will be added to cost of goods sold expense. Also, all of the fixed selling and fixed administrative costs were expensed during the period because these are period costs. These costs total $1,405,000. Under absorption costing, the total fixed costs expensed therefore equals $625,000 + $65,000 + $1,405,000, or $2,095,000.
The problem says that any over- or under-applied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the reporting year. This answer omits that adjustment.
This answer assumes that the fixed overhead applied was applied only to the units that were sold, and not to the number of units that were produced.