Question

Variable costs per unit:

Direct materials $ 9
Direct labor $ 10
Variable manufacturing overhead $ 5
Variable selling and administrative expenses $ 3
Fixed costs per year:
Fixed manufacturing overhead $ 150,000
Fixed selling and administrative expenses $ 400,000

During this year, 25,000 units were produced and 22,000 units were sold. The Finished Goods inventory account at the end of this year shows a balance of $72,000 for the 3,000 unsold units.


Required:

1-a. Calculate this year's ending balance in Finished Goods inventory two ways—using variable costing and using absorption costing.

1-b. Does it appear that the company is using variable costing or absorption costing to assign costs to the 3,000 units in its Finished Goods inventory?

2. Assume that the company wishes to prepare this year's financial statements for its stockholders.

a. Is Finished Goods inventory of $72,000 the correct amount to include on the balance sheet for external reporting purposes?

b. What balance should be reported in the Finis
hed Goods inventory account for external reporting purposes?

Answer 1

1-a. The ending balance in Finished Goods inventory using variable costing is $81,000 and using absorption costing is $99,000. 1-b. The company appears to be using absorption costing to assign costs to the 3,000 units in its Finished Goods inventory. 2-a. The Finished Goods inventory of $72,000 is not the correct amount to include on the balance sheet for external reporting purposes. 2-b. The balance that should be reported in the Finished Goods inventory account for external reporting purposes will depend on the costing method used.

Step-by-step explanation:

1-a. To calculate the ending balance in Finished Goods inventory using variable costing, we add up the variable costs per unit for the unsold units. In this case, the variable costs per unit are Direct materials ($9), Direct labor ($10), Variable manufacturing overhead ($5), and Variable selling and administrative expenses ($3), which total to $27. Therefore, the ending balance in Finished Goods inventory using variable costing is $27 * 3,000 = $81,000.

To calculate the ending balance in Finished Goods inventory using absorption costing, we add up the variable costs per unit and the fixed manufacturing overhead per unit for the unsold units. In this case, the fixed manufacturing overhead per unit is $150,000 / 25,000 = $6. Therefore, the ending balance in Finished Goods inventory using absorption costing is ($27 + $6) * 3,000 = $99,000.

1-b. Based on the calculation of the ending balance in Finished Goods inventory, it appears that the company is using absorption costing to assign costs to the 3,000 units in its Finished Goods inventory.

2-a. The Finished Goods inventory of $72,000 is not the correct amount to include on the balance sheet for external reporting purposes. The correct amount to include would depend on whether the company follows variable costing or absorption costing for external reporting.

2-b. For external reporting purposes, the balance that should be reported in the Finished Goods inventory account will depend on the costing method used. If the company uses variable costing for external reporting, the balance would be $81,000. If the company uses absorption costing for external reporting, the balance would be $99,000.