Question:
Inventory Costing for Financial Statements. The United Fiber Corporation mines and sells a fibrous mineral. On December 31, 19D, the inventory amounted to 25,000 tons of fiber; all this inventory was produced during 19D and is costed at $19.88 per ton, the average cost per ton produced in 19D. Production and costs in other years were as follows
|
Tons Produced and Average Costs
|
|
Tons
|
Cost
|
|
Year
|
Produced
|
per Ton
|
|
19A
|
170,000
|
S14.65
|
|
19B
|
180,000
|
14.85
|
|
19C
|
175,000
|
15.06
|
|
19D
|
110,000
|
19.88
|
|
Production Costs
|
|
|
|
|
Amounts
|
Per Ton
|
|
19C
|
19D
|
19C
|
19D
|
|
Tons produced
|
175,000
|
110,000
|
|
|
|
Direct labor
|
$ 472,500
|
S 401,500
|
$2.70
|
$3.65
|
|
Indirect labor
|
346,500
|
286,000
|
1.98
|
2.60
|
|
Supplies and other production
|
|
|
|
expenses
|
708,750
|
479,600
|
4.05
|
4.36
|
|
Depletion
|
262,500
|
165,000
|
1.50
|
1.50
|
|
Salaries (superintendents, plant
|
|
|
clerks, watchmen, etc.)
|
217,000
|
233,200
|
1.24
|
2.12
|
|
Depreciation
|
227,500
|
247,500
|
1.30
|
2.25
|
|
Other fixed expenses
|
400,750
|
374,000
|
2.29
|
3.40
|
|
Total
|
$2,635,500
|
$2,186,800
|
$15.06
|
$19.88
|
Indirect labor, supplies, and other production expenses are considered variable costs. There are no semivariable costs. Depletion is computed at SI. 50 per ton mined, and depreciation on machinery and equipment is computed on a straight-line basis. Due to an extended strike in 19D, much less of the fibrous mineral was mined than during the three preceding years in which production was considered normal. The management explained that the rise in 19D unit labor costs was caused by general increases of from 33% to 40% in hourly wage rates. The increase in the unit cost of supplies and other production expenses is accounted for by an increase in prices of about 10%. All increases took place at the beginning of the year.
Required:
1) Is the pricing of the closing inventory on December 31, 19D, at $19.88 per ton acceptable for financial statement purposes? Discuss fully.
2) Assuming that the closing inventory of $19.88 per ton is not acceptable for financial statement purposes, how should it be adjusted? Present calculations in full and state how the adjustment should be dealt with in the statements.
3) Discuss briefly the classification of fixed and variable costs.