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# Absorption vs variable costing

Monrad Corporation uses variable costing for internal reporting purposes. Its preadjusted trial balance for the year ended December 31 shows:

Cost of goods sold (at variable cost) \$750,000
Finished goods inventory (at variable cost) 75,000
Nonvariable product costs 462,000

An analysis shows that cost of goods sold represents 30,000 direct labor hours, and finished goods inventory 3,000 direct labor hours. Monrad feels that the best way of allocating a fair share of nonvariable production costs to products is on the basis of direct labor hours.

Required:

a. Prepare an adjusting entry that will put cost of goods sold and finished goods inventory on an absorption costing basis.
b. What will be the difference between pretax income on a variable costing basis and on an absorption costing basis (assume zero beginning of year finished goods inventory)?
c. What will be the December 31 amount of finished goods inventory on an absorption costing basis?

#### Solution Preview

a. Prepare an adjusting entry that will put cost of goods sold and finished goods inventory on an absorption costing basis.

In absorption costing the non variable product costs are included in manufacturing costs and not taken as period costs. We need to allocate the non variable product costs to cost of goods sold and ending inventory. The total direct labor hours are 33,000 and the cost to be ...

#### Solution Summary

The solution explains the calculations under variable costing and absorption costing

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