Sierra Company incurs the following costs to produce and sell its only product. Variable costs per unit:Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . $5Variable selling and administrative expenses . . . . . . . . . . . . $3Fixed costs per year:Fixed manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . $150,000Fixed selling and administrative expenses . . . . . . . . . . . . . . . $400,000 During this year, 25,000 units were produced and 22,000 units were sold. The Finished Goods inventory account at the end of this year shows a balance of $72,000 for the 3,000 unsold units.Required:1. Calculate this year’s ending balance in Finished Goods inventory two ways—using variable costing and using absorption costing. Does it appear that the company is using variable costing or absorption costing to assign costs to the 3,000 units in its Finished Goods inventory?2. Assume that the company wishes to prepare this year’s financial statements for its stockholders.a. Is Finished Goods inventory of $72,000 the correct amount to include on the balance sheet for external reporting purposes? Explain.b. What balance should be reported in the Finished Goods inventory account for external reporting purposes?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Sierra Company incurs the following costs to produce and sell its only 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 this year, 25,000 units were produced and 22,000 units were sold. The Finished Goods inventory account at the end of this year shows a balance of $72,000 for the 3,000 unsold units.
Required:
1. Calculate this year’s ending balance in Finished Goods inventory two ways—using variable costing and using absorption costing. Does it appear that the company is using variable costing or absorption costing to assign costs to the 3,000 units in its Finished Goods inventory?
2. Assume that the company wishes to prepare this year’s financial statements for its stockholders.
a. Is Finished Goods inventory of $72,000 the correct amount to include on the balance sheet for external reporting purposes? Explain.
b. What balance should be reported in the Finished Goods inventory account for external reporting purposes?
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