Question

please answer all parts please!

Sierra Company incurs the following costs to produce and sell its only product. Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expenses om $ 150,000 $ 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 Finished Goods inventory account for external reporting purposes?

Answer 1

1-a) Under absorption costing, unit cost of goods manufactured shall consider both variable and fixed mfg. costs incurred to produce the number goods. Therefore, $9 $10 $5 Direct material cost per unit Direct labor cost per unit Variable mfg. overhead per unit Fixed mfg. overhead per unit Product cost per unit Number of units in ending inventory Balance in ending Finished Goods Inventory $6_[$150000 / 25000 units produced = $6] $30 3,000 [25000 - 22000] $90,000 [3000 units x $30] Under variable costing, unit cost of goods manufactured shall consider variable mfg. costs only incurred to produce the number goods. Therefore, Direct material cost per unit Direct labor cost per unit Variable mfg. overhead per unit Product cost per unit Number of units in ending inventory Balance in ending Finished Goods Inventory $9 $10 $5 $24 3,000 [25000 - 22000] $72,000 (3000 units x $24]

1-b) It appears that the company is using variable costing to assign costs to the 3,000 units in Finished Goods Inventory. 2) a) Finished Goods Inventory of $72000 is not the correct amount to include on the balane sheet for external reporting purposes. b) Balance that should be reported in the Finished Goods Inventory account for external reporting purpose $90,000 Reason: Under absorption (= full) costing, unit cost of goods manufactured shall consider both variable and fixed manufacturing costs incurred to produce the number goods during the reporting period. On the other hand, variable costing, unit product cost shall consider only variable manufacturing costs incurred to produce the number goods during the reporting period. Particularly, the fixed manufacturing overhead costs only will be deferred to next reporting period under absorption costing when there are any ending inventory units due to number of units sold is less than number of units produced because both variable costing and absorption costing methods charge variable & fixed selling & administrative expenses to income statement fully during the period in which they are incurred. Absorption costing method is also called as traditional costing method and it is the method accepted for external reporting purpose under GAAP. In simple words, variable costing method can be used for management reporting only but not for external reporting purpose.