Question

Company XYZ manufactures a tangible product and sells the product at wholesale. In its first year of operations, XYZ manufactured 1,300 units of product and incurred $273,000 direct material cost and $165,750 direct labor costs. For financial statement purposes, XYZ capitalized $120,750 indirect costs to inventory. For tax purposes, it had to capitalize $151,750 indirect costs to inventory under the UNICAP rules. At the end of its first year, XYZ held 130 units in inventory. In its second year of operations, XYZ manufactured 2,600 units of product and incurred $559,000 direct material cost and $351,000 direct labor costs. For financial statement purposes, XYZ capitalized $215,000 indirect costs to inventory. For tax purposes, it had to capitalize $269,000 indirect costs to inventory under the UNICAP rules. At the end of its second year, XYZ held 390 items in inventory.

1. Compute XYZ’s cost of goods sold for book purposes and for tax purposes for second year assuming that XYZ uses the FIFO costing convention.
2. Compute XYZ’s cost of goods sold for book purposes and for tax purposes for second year assuming that XYZ uses the LIFO costing convention
3. Compute XYZ’s cost of goods sold for book purposes and for tax purposes for second year assuming that XYZ uses the FIFO costing convention. (Do not round intermediate calculations.)

   	A Book Tax Cost of beginning inventory $55,949 $73,320 Total cost of units produced Cost of units available for sale $55,949 $73,320 Cost of ending inventory Cost of goods sold $55,949 $73,320

4. Compute XYZ’s cost of goods sold for book purposes and for tax purposes for second year assuming that XYZ uses the LIFO costing convention. (Do not round intermediate calculations.)

   	Book Tax Cost of beginning inventory Total cost of units produced Cost of units available for sale $0 $0 Cost of ending inventory Cost of goods sold $0 $0

5. Required A

Answer 1

a.

FIFO:

	Book	Tax
Cost of beginning inventory	55,950	59,050
Total cost of units produced	1,125,000	1,179,000
Cost of units available for sale	1,180,950	1,238,050
Cost of ending inventory	(168,750)	(176,850)
Cost of goods sold	1,012,200	1,061,200

b.

LIFO:

	Book	Tax
Cost of beginning inventory	55,950	59,050
Total cost of units produced	1,125,000	1,179,000
Cost of units available for sale	1,180,950	1,238,050
Cost of ending inventory	(168,450)	(176,950)
Cost of goods sold	1,012,500	1,061,100

Calculation:

There might be rounding difference as the cost per unit have decimal places. As mentioned in question, the calculation done below is without rounding the intermediate calculations.

a. FIFO

Book:

To calculate the value of the cost of goods sold, under book and tax, we need to first calculate the beginning balances. For that, we need to calculate the ending of the first year inventory.

Direct material cost	273,000
Direct labor cost	165,750
Indirect costs	120,750
Total cost of 1300 units	559,500

The ending balance of first year = 130 units

So, the cost per unit = Total cost of 1300 units / 1300 units

= 559,500 / 1300 = 430.38

Ending inventory cost of first year/beginning cost of second year = 430.38 x 130 = 55,950

Total cost of units produced = sum of direct costs + indirect costs of second year

Direct material cost	559,000
Direct labor cost	351,000
Indirect costs	215,000
Total cost of 1300 units	1,125,000

Cost of units available for sale = Cost of beginning inventory + Total cost of units produced = 55,950 + 1,125,000 = 1,180,950

So, the cost per unit = 1,125,000 / 2,600 = 432.69 per unit for books

As, it is FIFO method the units from the first year is sold first.

And ending balance of first year = 130 x 432.69 = 55,950

Units from second year for sales = 2,600 - 390 = 2,210

So cost = 2,210  x 432.69 = 956,250

So total cost of good sold = 956,250 + 55,950= 1,012,200

Tax:

To calculate the value of the cost of goods sold, under book and tax, we need to first calculate the beginning balances. For that, we need to calculate the ending of the first year inventory.

Direct material cost	273,000
Direct labor cost	165,750
Indirect costs	151,750
Total cost of 1300 units	590,500

The ending balance of first year = 130 units

So, the cost per unit = Total cost of 1300 units / 1300 units

= 590,500/ 1300 = 454.23

Ending inventory cost of first year/beginning cost of second year = 454.23 x 130 = 59,050

Total cost of units produced = sum of direct costs + indirect costs of second year

Direct material cost	559,000
Direct labor cost	351,000
Indirect costs	269,000
Total cost of 1300 units	1,179,000

Cost of units available for sale = Cost of beginning inventory + Total cost of units produced = 59,050 + 1,179,000 = 1,238,050

So, the cost per unit = 1,179,000 / 2,600 = 453.46 per unit for books

As, it is FIFO method the units from the first year is sold first.

And ending balance of first year = 130 x 453.46 = 59,050

Units from second year for sales = 2,600 - 390 = 2,210

So cost = 2,210  x 453.46 = 1,002,150

So total cost of good sold = 1,002,150 + 59,050 = 1,061,200

b. LIFO:

Book:

The calculations until the Cost of units available for sale is same as the FIFO method.

The units available = 130 + 2600 = 2,730

So, after deducting the ending balance = 2,730 - 390 = 2,340

So, the book cost of goods sold = 2,340 units x 432.69 = 1,012,500

Tax:

The calculations until the Cost of units available for sale is same as the FIFO method.

The units available = 130 + 2600 = 2,730

So, after deducting the ending balance = 2,730 - 390 = 2,340

So, the book cost of goods sold = 2,340 units x 453.46 = 1,061,100