Question

Variable costs per unit:
Direct materials	$	10
Direct labor	$	8
Variable manufacturing overhead	$	3
Variable selling and administrative expenses	$	6
Fixed costs per year:
Fixed manufacturing overhead	$	117,000
Fixed selling and administrative expenses	$	320,000

  

During the last year, 29,250 units were produced and 24,000 units were sold. The Finished Goods inventory account at the end of the year shows a balance of $110,250 for the 5,250 unsold units.

Required:

1. Determine whether the company is using absorption costing or variable costing to cost units in the Finished Goods inventory account.

a. Calculate the ending balance in the Finished Goods inventory account under variable costing and absorption costing..

.

b. Which costing method is the company using to cost units in the Finished Goods inventory account?

	Absorption costing
	Variable costing

  

2. Assume that the company wishes to prepare financial statements for the year to issue to its stockholders.

a. Is the $110,250 figure for Finished Goods inventory the correct amount to use on these statements for external reporting purposes?

	Yes, because variable costing is generally accepted for external reporting.
	No, because variable costing is not generally accepted for external reporting.
	Yes, because absorption costing is generally accepted for external reporting.
	No, because absorption costing is not generally accepted for external reporting.

b. At what dollar amount should the 5,250 units be carried in the inventory for external reporting purposes?

Answer 1

	A	Unit Cost:	Variable Costing	Absorption Costing			* Fixed Manufacturing Overhead:
		Direct Material	10.0	10.0			Fixed Manufacturing OH	117000
		Direct Labor	8.0	8.0			Units Produced	29250
		Variable Manufacturing Overhead	3.0	3.0			Fixed Manufacturing Overhead	4.00
		Fixed Manufacturing Overhead*	-	4.0
		Total Unit Cost	21.0	25.0
		Closing Units	5,250.0	5,250.0
		Closing FG Balance	110,250.0	131,250.0
	B	Company is using Variable Costing as of now.
	2A	Answer is B
		No Since Variable Costing system is not generally accepted for External reporting
		It is only useful for Manegerial accounting
	2B	At Absorption Costing:
		131250/-