This year, Amber purchased a business that processes and packages landscape mulch.

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 million bags of mulch, but only 1 million bags remained in the ending inventory. What is Amber’s tax basis in her ending inventory if the UNICAP rules are used 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 rules to allocate indirect costs to inventory for tax purposes?

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Material: Salaries: Mulch and packaging Administrative supplies Factory labor Sales & advertising Administration Costs $ 500,000 25,000 Tax Inventory ? ? 1,200,000 ? 350,000 ? 520,000 ? Property taxes: Factory 460,000 ? Offices 270,000 ? Depreciation: Factory 800,000 ? Offices 150,000 ?