Question

Sparn Limited incurs the following costs to produce and sell a single product:

Variable costs per unit:
Direct materials	$	10
Direct labour		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-a. Is the company using absorption costing or variable costing to cost units in the Finished Goods Inventory account?

multiple choice 1

• Absorption costing

• Variable costing

1-b. Show computations to support your answer.

	Variable costing	absorption costing
Direct materials
direct labour
variable manufacturing overhead
Fixed manufacturing overhead
unit product cost	$0	$0
total cost 5,000 units

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

a. Is the $85,000 figure for finished goods inventory the correct amount to use on these statements for external reporting purposes?

multiple choice 2

• Yes

• No

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

Inventory value for extemal reporting purposes

?

Answer 1

1a:

Company is using "variable costing" to cost units in the Finished Goods Inventory account.

1b:

	Variable costing	absorption costing
Direct materials	10	10
direct labour	5	5
variable manufacturing overhead	2	2
Fixed manufacturing overhead (90000/30000)	0	3
unit product cost	17	20
total cost 5,000 units	85000	100000

2a:

No.

the $85,000 figure for finished goods inventory is not the correct amount to use on these statements for external reporting purposes.

2b:

Inventory value for extemal reporting purposes = $100,000