Amcor Inc produces and sells a single product The following

Amcor, Inc., produces and sells a single product. The following costs relate to its production and sale:

                       

                        Variable costs per unit:

                            Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . .                 $            10

                            Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 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. Is the company using absorption costing or variable costing to cost units in the Finished Goods                   inventory account? Show computations to support your answer.

ANSWER:

The company is using ________________________________ costing.

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

      stockholders.

    

     a.   Is the $85,000 figure for Finished Goods inventory the correct figure to use on these

           statements for external reporting purposes? Explain.

ANSWER:

The $85,000 is the correct or incorrect amount. (circle correct or incorrect)

Explain why the $85,000 is correct or incorrect.

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

      purposes.

ANSWER:

The inventory should be carried at _______________________.

Solution

Req 1: Company is using Variable costing in Inventory valuation. The unit product cost under variable costing; Material 10 Labour 5 Variable Oh 2 Total unit cost 17 Number of units 5000 Ending inventory 85000 Req 2: For external reporting purpose, $ 85000 is not the correct figure to report. The Inventory shall be valued as per full costing i.e. abosrption costsing Req 3: Unit cost as per Absorption: Material 10 Labour 5 Variable OH 2 Fixed Oh (90000/30000) 3 Unit product 20 Number of units 5000 Ending inventory 100000