Sierra Company incurs the following costs to produce and sell its only product.
| Variable costs per unit: | |
| Direct materials | $ 10 |
| Direct labor | $ 8 |
| Variable manufacturing overhead | $ 3 |
| Variable selling and administrative expenses | $ 5 |
| Fixed costs per year: | |
| Fixed manufacturing overhead | $ 93,750 |
| Fixed selling and administrative expenses | $ 310,000 |
During this year, 31,250 units were produced and 25,000 units were sold. The Finished Goods inventory account at the end of this year shows a balance of $131,250 for the 6,250 unsold units.
Required:
1-a. Calculate this year's ending balance in Finished Goods inventory two waysusing variable costing and using absorption costing.
1-b. Does it appear that the company is using variable costing or absorption costing to assign costs to the 6,250 units in its Finished Goods inventory?
2. Assume that the company wishes to prepare this year's financial statements for its stockholders.
a. Is Finished Goods inventory of $131,250 the correct amount to include on the balance sheet for external reporting purposes?
b. What balance should be reported in the Finished Goods inventory account for external reporting purposes?
