Sparrow Inc uses absorption costing in a FIFO inventory syst

Sparrow Inc. uses absorption costing in a FIFO inventory system. Sparrow had opening inventory of 170 units at a cost of $35 per unit. Ending inventory is 120 units. During 2017 Sparrow sold 1,600 units at $55 each. The following costs apply to Sparrow\'s operations for the year ended December 31, 2017.

Round to the nearest whole number. Do not use decimals or commas in your answer.

(a) What amounts will be reported on Sparrow\'s Income Statement for:

             Cost of goods sold $?

             Gross profit $?

             Period costs $?

(b) Sparrow also prepares a variable costing income statement for internal purposes. Assume the fixed manufacturing overhead attached to each unit in beginning inventory was $14 per unit. Will their variable costing net income be higher or lower than under absorption costing and by how much? and low or higher

*you\'ll have to calculate FMOH released from beginning inventory AND FMOH stored in ending inventory?

  

Direct material used in production	$ 12 per unit
Direct labour incurred	5 per unit
Fixed manufacturing overhead	$ 17,050
Variable manufacturing overhead	$ 4 per unit
Selling costs (40% variable)	$ 20,000
Admin costs (10% variable)	$ 30,000

Solution

(a) Answer Cost of Goods Sold = 52801 Gross Profit = 35199 (88000-52801) Period Cost = 50000 (20000+30000) Income Statement (Absorption Costing) Particulars Amount Amount Sales   (1600 units * $ 55) 88000 Production Cost: Direct Material consumed (1600*$12) 19200 Direct Labour cost (1600*$5) 8000 Variable Manufacturing Overhead (1600*$4) 6400 Fixed manufacturing Overhead 17050 Cost of Production 50650 Add: opening Stock (170*$35) 5950 Less: Closing Stock [ 120*(50650/1600)] 3799 Cost of Goods Sold 52801 Add: Selling and Distribution Cost 20000            Administration Cost 30000 50000 Total Cost 102801 Profit (Sales-Total Cost) -14801 Income Statement ( Marginal Costing) (b) Particulars Amount Amount Sales 88000 Variable manufacturing cost: Direct Material consumed (1600*$12) 19200 Direct Labour cost (1600*$5) 8000 Variable Manufacturing Overhead (1600*$4) 6400 Cost of Goods produced 33600 Add: Opening Stock {170*(35-14)} 3570 Less: Closing Stock {120*(33600/1600)} 2520 Cost of Goods Sold 34650 Add: Variable administration,selling and distribution overhead 11000 {(30000*10%) + (20000*40%)} Total Variable Cost 45650 Contribution (Sales-Total Variable Cost) 42350 Less: Fixed Cost (Production, administration, selling etc) 58430 Net Profit -16080 Profit as per Marginal costing is lower by 1279 due to difference in valuation of closing stock (ie, in marginal costing fixed cost will be treated as period cost while production cost in absorbtion costing