Question

Amcor, Inc., produces and sells a single product. The following costs relate to its production and sale:

                       

                        Variable costs per unit:

                            Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . .                 $            10

                            Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 5

                            Variable manufacturing overhead . . . . . . . . . . . . .                                2

                            Variable selling and administrative expenses . . . .                                4

                        Fixed costs per year:

                            Fixed manufacturing overhead . . . . . . . . . . . . . . .                  $    90,000

                            Fixed selling and administrative expenses . . . . . .                      300,000

During the last year, 30,000 units were produced and 25,000 units were sold. The Finished Goods inventory account at the end of the year shows a balance of $85,000 for the 5,000 unsold units.

Required:

1. Is the company using absorption costing or variable costing to cost units in the Finished Goods                   inventory account? Show computations to support your answer.

ANSWER:

The company is using ________________________________ costing.

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

      stockholders.

    

     a.   Is the $85,000 figure for Finished Goods inventory the correct figure to use on these

           statements for external reporting purposes? Explain.

ANSWER:

The $85,000 is the correct or incorrect amount. (circle correct or incorrect)

Explain why the $85,000 is correct or incorrect.

b.       At what dollar amount should the 5,000 units be carried in inventory for external reporting

      purposes.

ANSWER:

The inventory should be carried at _______________________.

Answer 1

Req 1:
Company is using Variable costing in Inventory valuation.
The unit product cost under variable costing;
Material		10
Labour		5
Variable Oh		2
Total unit cost		17
Number of units		5000
Ending inventory		85000
Req 2:
For external reporting purpose, $ 85000 is not the correct figure to report.
The Inventory shall be valued as per full costing i.e. abosrption costsing
Req 3:
Unit cost as per Absorption:
Material			10
Labour			5
Variable OH			2
Fixed Oh (90000/30000)			3
Unit product			20
Number of units			5000
Ending inventory			100000