Chapter 6, Problem 1E

(a)

To determine

Absorption Costing

Absorption costing is compulsory under Generally Accepted Accounting Principles (GAAP) for financial statements circulated to the external users. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Fixed factory overhead and variable factory overhead included as a part of factory overhead.

Variable Costing

Managers frequently use variable costing for internal purposes for taking decision making. The cost of goods manufactured includes direct materials, direct labor, and variable factory overhead. Fixed factory overhead treated as period (fixed) expense.

Thecost of finished goods inventory reported on the balance sheet under the absorption costing concept.

(b)

To determine

The cost of finished goods inventory reported on the balance sheet under the variable costing concept.