# Company XYZ manufactures a tan

Company XYZ manufactures a tangible product and sells theproduct at wholesale. In its first year of operations, XYZmanufactured 1,400 units of product and incurred \$224,000 directmaterial cost and \$108,500 direct labor costs. For financialstatement purposes, XYZ capitalized \$63,500 indirect costs toinventory. For tax purposes, it had to capitalize \$94,500 indirectcosts to inventory under the UNICAP rules. At the end of its firstyear, XYZ held 280 units in inventory. In its second year ofoperations, XYZ manufactured 2,800 units of product and incurred\$462,000 direct material cost and \$238,000 direct labor costs. Forfinancial statement purposes, XYZ capitalized \$102,000 indirectcosts to inventory. For tax purposes, it had to capitalize \$156,000indirect costs to inventory under the UNICAP rules. At the end ofits second year, XYZ held 420 items in inventory.

Required: Compute XYZ’s cost of goods sold for book purposes andfor tax purposes for second year assuming that XYZ uses the FIFOcosting convention.

Compute XYZ’s cost of goods sold for book purposes and for taxpurposes for second year assuming that XYZ uses the LIFO costingconvention.

• Required A
• Required B

Compute XYZ’s cost of goods sold for book purposes and for taxpurposes for second year assuming that XYZ uses the FIFO costingconvention. (Do not round intermediate calculations.)

 Book Tax Cost of beginning inventory \$802,000 \$856,000 Total cost of units produced 2,800 2,800 Cost of units available for sale \$804,800 \$858,800 Cost of ending inventory Cost of goods sold \$804,800 \$858,800

The Solution of the following sum along with workings are donebelow.

Note: FIFO means First In First Out, that is goods producesfirst are solf first. LIFO means last in first out, that is goodsproduced last are sold first.

General Triva: LIFO is permitted under US GAAP but prohibittedunder IFRS.

Solution:

 1nd Year Particulars Book Purpose (\$) Tax Purpose (\$) Direct Material 224000 224000 Direct Labour 108500 108500 Capitalization of Indirectexpenses 63500 94500 Total Cost 396000 427000 ÷ Total Units Produces 1400 1400 Per Unit Cost 282.86 305.00 Closing Inventory of 280Units 79200.80 85400 2nd Year Opening Inventory 280Units 79200.80 85400 2ndYear’s Production: Direct Material 462000 462000 Direct Labour 238000 238000 Capitalization of Indirectexpenses 102000 156000 Total Cost 802000 856000 ÷ Total Units Produces 2800 2800 Per Unit Cost 286.43 305.71 RequiredAnswers: Total Unit Sold in Second Year= Opening Units + Current Production- Closing Units = 280 + 2800 -420 = 2660 A. Ifcompany Follows FIFO then out of 2660 Units 280 are of 1st Year and2380 are of 2nd year Particulars Book Purpose (\$) Tax Purpose (\$) Cost of Goods Sold: * From 1st Year (280 x 282.86) (280 x 305) 79200.8 85400 *From 2nd Year (2380 x 286.43) (2380 x 305.71) 681703.40 727589.80 COGS 760904.20 812989.80 Closing Inventory : 420 units all of 2ndYear (420 x 286.43) (420 x 305.71) 120300.60 128398.20 If company Follows LIFO then all of2660 Units are of 2nd Year Particulars Book Purpose (\$) Tax Purpose (\$) Cost of Goods Sold: *From 2nd Year (2660 x 286.43) (2660 x 305.71) 761903.80 813188.60 COGS 761903.80 813188.60 Closing Inventory : *280 units of 1st Year (280 x 282.86) (280 x 305) 79200.8 85400 *140 units of 2nd Year (140 x 286.43) (140 x 305.71) 40100.20 42799.40 Total Closing Inventory 119301.00 128199.40

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