Question

Company XYZ manufactures a tangible product and sells the product at wholesale. In its first year of operations, XYZ manufactured 1,400 units of product and incurred $224,000 direct material cost and $108,500 direct labor costs. For financial statement purposes, XYZ capitalized $63,500 indirect costs to inventory. For tax purposes, it had to capitalize $94,500 indirect costs to inventory under the UNICAP rules. At the end of its first year, XYZ held 280 units in inventory. In its second year of operations, XYZ manufactured 2,800 units of product and incurred $462,000 direct material cost and $238,000 direct labor costs. For financial statement purposes, XYZ capitalized $102,000 indirect costs to inventory. For tax purposes, it had to capitalize $156,000 indirect costs to inventory under the UNICAP rules. At the end of its second year, XYZ held 420 items in inventory.

Required: 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.

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.

• Required A
• Required B

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.)

	Book Tax Cost of beginning inventory $802,000 $856,000 Total cost of units produced 2,800 2,800 Cost of units available for sale $804,800 $858,800 Cost of ending inventory Cost of goods sold $804,800 $858,800

Answer 1

The Solution of the following sum along with workings are done below.

Note: FIFO means First In First Out, that is goods produces first are solf first. LIFO means last in first out, that is goods produced last are sold first.

General Triva: LIFO is permitted under US GAAP but prohibitted under IFRS.

Solution:

1nd Year
Particulars	Book Purpose ($)	Tax Purpose ($)
Direct Material	224000	224000
Direct Labour	108500	108500
Capitalization of Indirect expenses	63500	94500
Total Cost	396000	427000
÷ Total Units Produces	1400	1400
Per Unit Cost	282.86	305.00
Closing Inventory of 280 Units	79200.80	85400
2nd Year
Opening Inventory 280 Units	79200.80	85400
2nd Year's Production:
Direct Material	462000	462000
Direct Labour	238000	238000
Capitalization of Indirect expenses	102000	156000
Total Cost	802000	856000
÷ Total Units Produces	2800	2800
Per Unit Cost	286.43	305.71
Required Answers:
Total Unit Sold in Second Year =	Opening Units + Current Production - Closing Units
=	280 + 2800 -420
=	2660
A. If company Follows FIFO then out of 2660 Units 280 are of 1st Year and 2380 are of 2nd year
Particulars	Book Purpose ($)	Tax Purpose ($)
Cost of Goods Sold:
* From 1st Year	(280 x 282.86)	(280 x 305)
	79200.8	85400
*From 2nd Year	(2380 x 286.43)	(2380 x 305.71)
	681703.40	727589.80
COGS	760904.20	812989.80
Closing Inventory :
420 units all of 2nd Year	(420 x 286.43)	(420 x 305.71)
	120300.60	128398.20
If company Follows LIFO then all of 2660 Units are of 2nd Year
Particulars	Book Purpose ($)	Tax Purpose ($)
Cost of Goods Sold:
*From 2nd Year	(2660 x 286.43)	(2660 x 305.71)
	761903.80	813188.60
COGS	761903.80	813188.60
Closing Inventory :
*280 units of 1st Year	(280 x 282.86)	(280 x 305)
	79200.8	85400
*140 units of 2nd Year	(140 x 286.43)	(140 x 305.71)
	40100.20	42799.40
Total Closing Inventory	119301.00	128199.40