Question

Sierra Company incurs the following costs to produce and sell a single 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 11 6 3 6 $ $ $ 90,750 290,000 During the last year, 30,250 units were produced and 26,000 units were sold. The Finished Goods inventory account at the end of the year shows a balance of $85,000 for the 4,250 unsold units. Required: 1. Determine whether the company is using absorption costing or variable costing cost units in the Finished Goods inventory account a. Calculate the ending balance in the Finished Goods inventory account under variable costing and absorption costing. Ending Balance in Finished Goods Variable costing Absorption costing b. Which costing method is the company using to cost units in the Finished Goods inventory account? Absorption costing O Variable costing 2. Assume that the company wishes to prepare financial statements for the year issue to its stockholders. a. Is the $85,000 figure for Finished Goods inventory the correct amount to use on these statements for external reporting purposes? Yes, because variable costing is generally accepted for external reporting O No, because variable costing is not generally accepted for external reporting. Yes, because absorption costing is generally accepted for extemal reporting. O No, because absorption costing is not generally accepted for extemal reporting. b. At what dollar amount should the 4,250 units be carried in the inventory for external reporting purposes? Finished goods inventory balance for external reporting purposes

Answer 1

Requirement 1 A

Product Cost per Unit as per Variable Costing = Direct Materials Costs per Unit + Direct Labour Cost per Unit + Variable Manufacturing Overhead per Unit

Product Costs per Unit as per Variable Costing = 11 + 6 + 3 = $ 20

Ending Units Inventory = Units Produced - Units Sold

Ending Units Inventory = 30,250 - 26,000 = 4,250 Units

Value of Ending Inventory = 4,250 Units * Product Cost per Unit as per Variable Costing

Value of Ending Inventory = 4,250 * 20 = $ 85,000

Product Costs per Unit as per Absorption Costing = Direct Materials Cost per Unit + Direct Labour Cost per Unit + Variable Manufacturing Overhead per Unit + Fixed Manufacturing Overhead per Unit

Product Costs per Unit as per Absorption Costing = 11 + 6 + 3 +3 = $ 23

Value of Ending Inventory as per Absorption Costing = Ending Inventory in Units * Product Cost per Unit as per Absorption Costing

Value of Ending Inventory = 4,250 * $ 23 = $ 97,750

Notes

For Absorption Costing Fixed Manufacturing Overhead per Unit = Total Fixed Manufacturing Overhead / Total Units Produced

= 90,750/30,250

= $ 3 per Unit

Requirement 1 B

Variable Cosing

Requirement 2A

Option B is the Correct Answer

No Variable Costing is not accepted for external reporting.

As per GAAP Generally Accepted Accounting Principle Absorption Costing is to be used for External Reporting purposes.

Requirement 2B

Inventory of Finished Goods to be reported as per Absorption Costing which is of $ 97,750.

Value of Ending Inventory to be reported for external reporting = $ 97,750

Calculation of this has already been performed in Part 1 A of the Question.