Sierra Company incurs the following costs to produce and sell its only product.

Variable costs per unit:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $  9

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $10

Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . .     $  5

Variable selling and administrative expenses . . . . . . . . . . . .     $   3

Fixed costs per year:

Fixed manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . .     $150,000

Fixed selling and administrative expenses . . . . . . . . . . . . . . .     $400,000

During this year, 25,000 units were produced and 22,000 units were sold. The Finished Goods inventory account at the end of this year shows a balance of $72,000 for the 3,000 unsold units.

Required:

1. Calculate this year’s ending balance in Finished Goods inventory two ways—using variable costing and using absorption costing. Does it appear that the company is using variable costing or absorption costing to assign costs to the 3,000 units in its Finished Goods inventory?

2. Assume that the company wishes to prepare this year’s financial statements for its stockholders.

a. Is Finished Goods inventory of $72,000 the correct amount to include on the balance sheet for external reporting purposes? Explain.

b. What balance should be reported in the Finished Goods inventory account for external reporting purposes?