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 $156,000indirect costs to inventory under the UNICAP rules. At the end ofits second year, XYZ held 420 items in inventory.
Required: Compute XYZ’s cost of goods sold for book purposes andfor tax purposes for second year assuming that XYZ uses the FIFOcosting convention.
Compute XYZ’s cost of goods sold for book purposes and for taxpurposes for second year assuming that XYZ uses the LIFO costingconvention.
- Required A
- Required B
Compute XYZ’s cost of goods sold for book purposes and for taxpurposes for second year assuming that XYZ uses the FIFO costingconvention. (Do not round intermediate calculations.)
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Answer:
The Solution of the following sum along with workings are donebelow.
Note: FIFO means First In First Out, that is goods producesfirst are solf first. LIFO means last in first out, that is goodsproduced last are sold first.
General Triva: LIFO is permitted under US GAAP but prohibittedunder IFRS.
Solution:
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1nd Year |
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Particulars |
Book Purpose ($) |
Tax Purpose ($) |
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Direct Material |
224000 |
224000 |
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Direct Labour |
108500 |
108500 |
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Capitalization of Indirectexpenses |
63500 |
94500 |
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Total Cost |
396000 |
427000 |
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÷ Total Units Produces |
1400 |
1400 |
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Per Unit Cost |
282.86 |
305.00 |
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Closing Inventory of 280Units |
79200.80 |
85400 |
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2nd Year |
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Opening Inventory 280Units |
79200.80 |
85400 |
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2ndYear’s Production: |
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Direct Material |
462000 |
462000 |
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Direct Labour |
238000 |
238000 |
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Capitalization of Indirectexpenses |
102000 |
156000 |
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Total Cost |
802000 |
856000 |
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÷ Total Units Produces |
2800 |
2800 |
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Per Unit Cost |
286.43 |
305.71 |
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RequiredAnswers: |
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Total Unit Sold in Second Year= |
Opening Units + Current Production- Closing Units |
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280 + 2800 -420 |
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| = |
2660 |
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A. Ifcompany Follows FIFO then out of 2660 Units 280 are of 1st Year and2380 are of 2nd year |
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Particulars |
Book Purpose ($) |
Tax Purpose ($) |
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Cost of Goods Sold: |
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* From 1st Year |
(280 x 282.86) |
(280 x 305) |
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79200.8 |
85400 |
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*From 2nd Year |
(2380 x 286.43) |
(2380 x 305.71) |
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681703.40 |
727589.80 |
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COGS |
760904.20 |
812989.80 |
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Closing Inventory : |
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420 units all of 2ndYear |
(420 x 286.43) |
(420 x 305.71) |
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120300.60 |
128398.20 |
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If company Follows LIFO then all of2660 Units are of 2nd Year |
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Particulars |
Book Purpose ($) |
Tax Purpose ($) |
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Cost of Goods Sold: |
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*From 2nd Year |
(2660 x 286.43) |
(2660 x 305.71) |
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761903.80 |
813188.60 |
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COGS |
761903.80 |
813188.60 |
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Closing Inventory : |
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*280 units of 1st Year |
(280 x 282.86) |
(280 x 305) |
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79200.8 |
85400 |
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*140 units of 2nd Year |
(140 x 286.43) |
(140 x 305.71) |
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40100.20 |
42799.40 |
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Total Closing Inventory |
119301.00 |
128199.40 |
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