Part 1: Charlie manufactures and sells high-quality, handmade wooden angels. He began the current year with zero finished goods inventories. He expected FMOH would be $33,000 and allocated using labor costs which were estimated to be $33,000 as well. During the year, Charlie produced angels that used $24,000 in materials and $30,000 in labor. At year end, Charlie estimated the 1,000 units in ending finished goods inventory included $5,000 of materials and $7,500 of labor. No variable manufacturing overhead costs were estimated or actually incurred. Charlie would like to know:
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Part 1:
Charlie manufactures and sells high-quality, handmade wooden angels.
He began the current year with zero finished goods inventories. He expected FMOH would be $33,000 and allocated using labor costs which were estimated to be $33,000 as well.
During the year, Charlie produced angels that used $24,000 in materials and $30,000 in labor.
At year end, Charlie estimated the 1,000 units in ending finished goods inventory included $5,000 of materials and $7,500 of labor. No variable
Charlie would like to know:
- What is the inventoriable cost per unit of finished goods using absorption costing and what amount will appear on the balance sheet for ending finished goods inventory?
- If variable costing was used to value ending finished goods inventory, will the inventoriable cost per unit amount be higher, lower or the same? Why?
Part 2:
Charlie is considering changing the method to allocate FMOH and using material costs as the allocation basis. Material costs were estimated to be $26,400 for the year.
If this change is made, would the value of ending finished goods inventory using absorption costing increase, decrease or stay the same?
Would this change affect what is reported as net operating income on the GAAP Income Statement?
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