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. 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?
Variable costing
Absorption 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 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 5,000 units be carried in inventory for external reporting purposes?
Finished goods inventory balance for external reporting purposes__________
Michaels Company segments its income statement into its East and West Divisions. The company's overall sales, contribution margin ratio, and net operating income are $600,000, 50%, and $50,000, respectively. The West Division's contribution margin and contribution margin ratio are $150,000 and 75%, respectively. The East Division's segment margin is $70,000. The company has $60,000 of common fixed costs that cannot be traced to either division.