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

Variable costs per unit:
Direct materials	$	23
Direct labour		10
Variable manufacturing overhead		3
Variable selling and administrative expenses		7
Fixed costs per year:
Fixed manufacturing overhead		192,800
Fixed selling and administrative expenses		416,000

During the last year, 48,200 units were produced and 32,000 units were sold. The Finished Goods Inventory account at the end of the year shows a balance of $194,400 for the 5,400 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 $194,400 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 5,400 units be carried in inventory for external reporting purposes?