Question

Sierra Company incurs the following costs to produce and sell its only product.

Variable costs per unit:
Direct materials	$	12
Direct labor	$	9
Variable manufacturing overhead	$	3
Variable selling and administrative expenses	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	120,000
Fixed selling and administrative expenses	$	300,000

During this year, 30,000 units were produced and 24,750 units were sold. The Finished Goods inventory account at the end of this year shows a balance of $126,000 for the 5,250 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 5,250 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 $126,000 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

	unit product cost
				Absorption	Variable
	Direct materials			12	12
	direct labor			9	9
	variable MOH			3	3
	Fixed MOH	(120000/30000)		4
	unit product cost			28	24
	Ending inventory cost =			ending inventory closing * unit product cost
1.a)				ending bal in finished goods
	Variable costing			126000
	Absorption costing			147000
b)	Variable costing
2)	No, because variable costing is not generally accepted for external reporting
b)	finisehd goods inventory balance for external reporting purposes						147000