Sparn Limited incurs the following costs to produce and sell a single product:

Variable costs per unit:Direct materials$24Direct labour14Variable manufacturing overhead6Variable selling and administrative expenses6Fixed costs per year:Fixed manufacturing overhead203,400Fixed selling and administrative expenses590,000

During the last year, 33,900 units were produced and 29,500 units were sold. The Finished Goods Inventory account at the end of the year shows a balance of $193,600 for the 4,400 unsold units.

Required:

1-a.Is the company using absorption costing or variable costing to cost units in the Finished Goods Inventory account?

• Absorption costing
• Variable costing

1-b.Show computations to support your answer.

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

a.Is the $193,600 figure for finished goods inventory the correct amount to use on these statements for external reporting purposes?

• Yes
• No

b.At what dollar amount should the 4,400 units be carried in inventory for external reporting purposes?

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