Question

Sierra Company incurs the following costs to produce and sell a single product. Variable costs per...

Sierra Company incurs the following costs to produce and sell a single product.

Variable costs per unit:
Direct materials $ 11
Direct labor $ 9
Variable manufacturing overhead $ 4
Variable selling and administrative expenses $ 5
Fixed costs per year:
Fixed manufacturing overhead $ 88,500
Fixed selling and administrative expenses $ 300,000

  

During the last year, 29,500 units were produced and 25,000 units were sold. The Finished Goods inventory account at the end of the year shows a balance of $108,000 for the 4,500 unsold units.

Required:

1. Determine whether the company is using absorption costing or variable costing to 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..

b. Which costing method is the company using to cost units in the Finished Goods inventory account?

Absorption costing
Variable costing

  

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

a. Is the $108,000 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.
No, because variable costing is not generally accepted for external reporting.
Yes, because absorption costing is generally accepted for external reporting.
No, because absorption costing is not generally accepted for external reporting.


b. At what dollar amount should the 4,500 units be carried in the inventory for external reporting purposes?

Business   Accounting   
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Homework Answers

Answer #1

1a-THE COMPANY IS USING VARIABLE COSTING APPROACH BECAUSE IT HAS TAKEN ONLY VARIABLE COST IN THE CALCULATION.

LOOK AT THE CALCULATION-

DIRECT MATERIAL-11

DIRECT LABOUR-9

VARIABLE MANUFACTURING OVERGEAD-4

TOTAL=24

THEREFORE INVENTORY VALUE=24*4500=$108000

B-THE VALUE OF FINISHED GOODS INVENTORY UNDER THE ABSORPTION COSING APPROACH WILL BE-

TOTAL COST ALREADY CALCULATED=24+FIXED MANUFACTURING OVERHEAD

=24+88500/29500

=24+3

=27

THEREFORE COST FOR 4500 UNITS=4500*27=121500

NOTE-IN THE ABSORPTION COSTING METHOD, FIXED OVERHEAD COSTS ARE ALSO INCLUDED IN THE TOTAL COST.

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