Question

Sierra Company incurs the following costs to produce and sell a single product.
Variable costs per unit:
Direct materials $9
Direct labor $10
Variable manufacturing overhead $5
Variable selling and administrative expenses $3
Fixed costs per year:
Fixed manufacturing overhead $150,000
Fixed selling and administrative expenses $400,000
________________________________________
During the last year, 25,000 units were produced and 22,000 units were sold. The Finished Goods inventory account at the end of the year shows a balance of $72,000 for the 3,000 unsold units.
Compute the total cost of finished goods inventory using variable costing?
Compute the total cost of finished goods inventory using absorption costing?
At what dollar amount should the 3,000 units be carried in the inventory for external reporting purposes?

Answer 1

Answer:

a) $72,000

b) $90,000

c) $90,000

Explanation:

As per the data given in the question,

a) By using variable costing We can calculate the Total cost of finished goods inventory as follows:

= 3,000 units ×($9+$10+$5)

= $72,000

b) By using absorption costing the total cost of finished goods inventory can be calculated as follows:

= 3,000 units ×[ ($9+$10+$5)+($150,000÷25,000)]

= $90,000

c) 3,000 units should be carried in the inventory for external purposes at

= $90,000