Smith and David Fabricating Co. is considering changing its method of inventory valuation from absorption costing to direct costing. You are to determine the effects of the proposed change on the 19X0O financial statements.

The company manufactures fishing poles made from Marsh plastic. The Marsh plastic is added before processing starts, and direct labor and factory overhead are added evenly during the manufacturing process. Production capacity is 110,000 fishing poles annually. The standard costs per pole are : jk5

During 19X0, 220,000 pounds of Marsh plastic were purchased and 230,000 pounds were transferred to work-in-process inventory, and 110,000 fishing poles were transferred to finished goods inventory. Actual fixed manufacturing overhead during the year was $121,000. There were no variances between standard variable costs and actual variable costs during the year.
Required:
a Prepare schedules which represent the computation of 1 Equivalent units of production for direct materials, direct labor, and factory overhead 2 Number of units sold 3 Standard unit cost under direct costing and absorption costing 4 Amount, if any, of over- or underapplied fixed manufacturing overhead b Prepare a comparative statement of cost of goods sold using standard direct costing and standard absorption costing.

Transcribed Image Text:

Marsh plastic (2 pounds) Direct labor... Variable manufacturing overhead.. Fixed manufacturing overhead $3.00 6.00 1.00 1.10 A process cost system is used employing standard costs. Variances from standard costs are now charged or credited to cost of goods sold. If direct costing were adopted, only variances resulting from variable costs would be charged or credited to cost of goods sold. Inventory information for 19X0 follows: UNITS January 1 December 31 Marsh plastic (pounds) 50,000 40.000 Work-in-process inventory processed 10,000 processed 15,000 Finished goods inventory 20,000 12,000