Norwood Corporation is considering changing its method of inventory valuation from absorption costing to direct costing and engaged you to determine the effect of the proposed change on the \(20 \mathrm{X} 0\) financial statements.

The corporation manufactures Gink which is sold for \(\$ 20\) per unit. Marsh is added before processing starts and labor and overhead are added evenly during the manufacturing process. Production capacity is budgeted at 110,000 units of Gink annually. The standard costs per unit of Gink are:

Required:

(a) Prepare schedules which present the computation of:
(1) Equivalent units of production for material, labor, and overhead.

(2) Number of units sold.
(3) Standard unit costs 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.

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Marsh, 2 pounds.... Labor............... $3.00 $6.00 Variable manufacturing overhead............... $1.00 Fixed manufacturing overhead.............. $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 data for 20X0 follow: Units January 1 December 31 Marsh (pounds............. .50,000 40,000 Work-in-process (2/5) Processed.................... 10,000. (1/3) Processed........... 15,000 Finished goods....... .. 20,000 12,000 During 20X0, 220,000 pounds of Marsh were purchased and 230,000 pounds were transferred to work-in-process. Also, 110,000 units of Gink were transferred to finished goods. 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.