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

Variable costs per unit:
Direct materials	$	20
Direct labour		10
Variable manufacturing overhead		4
Variable selling and administrative expenses		8
Fixed costs per year:
Fixed manufacturing overhead		180,000
Fixed selling and administrative expenses		600,000

During the last year, 30,000 units were produced and 22,500 units were sold. The Finished Goods Inventory account at the end of the year shows a balance of $85,000 for the 2,500 unsold units.

Required:

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

multiple choice 1

• 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 $85,000 figure for finished goods inventory the correct amount to use on these statements for external reporting purposes?

multiple choice 2

• Yes

• No

b. At what dollar amount should the 2,500 units be carried in inventory for external reporting purposes?

Variable Costing Absorption Costing Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Unit product cost Total cost, 2,500 units Inventory value for external reporting purposes