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?