Amcor, Inc., produces and sells a single product. The following costs relate to its production and sale:

Variable costs per unit:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Variable manufacturing overhead . . . . . . . . . . . . . 2

Variable selling and administrative expenses . . . . 4

Fixed costs per year:

Fixed manufacturing overhead . . . . . . . . . . . . . . . $ 90,000

Fixed selling and administrative expenses . . . . . . 300,000

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. Is the company using absorption costing or variable costing to cost units in the Finished Goods inventory account? Show computations to support your answer.

ANSWER:

The company is using ________________________________ 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 figure to use on these

statements for external reporting purposes? Explain.

ANSWER:

The $85,000 is the correct or incorrect amount. (circle correct or incorrect)

Explain why the $85,000 is correct or incorrect.

b. At what dollar amount should the 5,000 units be carried in inventory for external reporting

purposes.

ANSWER:

The inventory should be carried at _______________________.