Sierra Company incurs the following costs to produce and sell a single product.

Variable costs per unit:

Direct materials $ 11

Direct labor $ 7

Variable manufacturing overhead $ 3

Variable selling and administrative expenses $ 4

Fixed costs per year:

Fixed manufacturing overhead $ 84,750

Fixed selling and administrative expenses $ 305,000

During the last year, 28,250 units were produced and 24,500 units were sold. The Finished Goods inventory account at the end of the year shows a balance of $78,750 for the 3,750 unsold units.

Required:

1. Determine whether the company is using absorption costing or variable costing to cost units in the Finished Goods inventory account.

a. Calculate the ending balance in the Finished Goods inventory account under variable costing and absorption costing.

Ending Balance in Finished Goods

Variable costing __________

Absorption costing __________

b. Which costing method is the company using to cost units in the Finished Goods inventory account?

_____ Absorption costing

_____ Variable costing

2. Assume that the company wishes to prepare financial statements for the year to issue to its stockholders.

a. Is the $78,750 figure for Finished Goods inventory the correct amount to use on these statements for external reporting purposes?

_____ Yes, because variable costing is generally accepted for external reporting.

_____ No, because variable costing is not generally accepted for external reporting.

_____ Yes, because absorption costing is generally accepted for external reporting.

_____ No, because absorption costing is not generally accepted for external reporting.

b. At what dollar amount should the 3,750 units be carried in the inventory for external reporting purposes? Finished goods inventory balance for external reporting purposes __________