Question

Parts A, B & C

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Question 1 Not yet answered Marked out of 31.00 Flag question Variable and Absorption Costing Scott Manufacturing makes only one product with total unit manufacturing costs of $59, of which $41 is variable. No units were on hand at the beginning of 2015. During 2015 and 2016, the only product manufactured was sold for $93 per unit, and the cost structure did not change. Scott uses the first-in, first-out inventory method and has the following production and sales for 2015 and 2016 2015 2016 Units Manufactured Units Sold 120,000 90,000 120,000 130,000 a. Prepare gross profit computations for 2015 and 2016 using absorption costing. Do not use negative signs with your answers. Absorption Costing 2015 2016 Sales Cost of goods sold: Beginning inventory Production Goods available Less: Ending inventory Cost of goods sold Gross profit $ $

Answer 1

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Scott Manufacturing
Under absorption costing fixed production overhead is also a part of product cost.
Cost of goods manufactured	2015	2016
Production units	120,000.00	120,000.00	B
Product cost	59.00	59.00	See A
Cost of goods manufactured	7,080,000.00	7,080,000.00	C=B*A
Ending Inventory	2015	2016
Opening units	-	30,000.00	D	This is closing units of January.
Add: Production units	120,000.00	120,000.00	See B
Less: Sales units	90,000.00	130,000.00	E
Ending Inventory (units)	30,000.00	20,000.00	F=D+B-E
Product cost	59.00	59.00	See A
Cost of Ending Inventory	1,770,000.00	1,180,000.00	G=F*A
Sales Revenue	2015	2016
Units sold	90,000.00	130,000.00	See E
Sell price	93.00	93.00	H
Sales Revenue	8,370,000.00	12,090,000.00	I=E*H
Answer a
Profit Statement- Absorption costing	2015	2016
Sales	8,370,000.00	12,090,000.00	See I
Less:
Cost of goods sold
Beginning Inventory	-	1,770,000.00	This is value of closing inventory of 2015.
Production	7,080,000.00	7,080,000.00	See C
Goods available	7,080,000.00	8,850,000.00
Less: Closing Finished goods	1,770,000.00	1,180,000.00	See G
Cost of goods sold	5,310,000.00	7,670,000.00	N
Gross Profit	3,060,000.00	4,420,000.00	O=I-N
Under marginal costing only variable production cost is a part of product cost and all the fixed cost is charged off in the month its incurred.
Cost of goods manufactured	2015	2016
Production units	120,000.00	120,000.00	See B
Product cost (only variable)	41.00	41.00	See P
Cost of goods manufactured	4,920,000.00	4,920,000.00	Q=B*P
Ending Inventory	2015	2016
Opening units	-	30,000.00	See D	This is closing units of 2015.
Add: Production units	120,000.00	120,000.00	See B
Less: Sales units	90,000.00	130,000.00	See E
Ending Inventory (units)	30,000.00	20,000.00	See F
Product cost	41.00	41.00	See P
Cost of Ending Inventory	1,230,000.00	820,000.00	R=P*F
Sales Revenue	2015	2016
Units sold	90,000.00	130,000.00	See E
Sell price	93.00	93.00	See H
Sales Revenue	8,370,000.00	12,090,000.00	See I
Fixed Production Overhead cost	2015	2016
Production units	120,000.00	120,000.00	See B
Fixed cost per unit ( $ 59- $ 41)	18.00	18.00	S
Fixed Production Overhead cost	2,160,000.00	2,160,000.00	T=B*S
Answer b
Profit Statement- Marginal costing	2015	2016
Sales	8,370,000.00	12,090,000.00	See I
Less:
Beginning Inventory	-	1,230,000.00	This is value of closing inventory of 2015.
Production	4,920,000.00	4,920,000.00	See Q
Goods available	4,920,000.00	6,150,000.00
Less: Closing Finished goods	1,230,000.00	820,000.00	See R
Variable Cost of goods sold	3,690,000.00	5,330,000.00	U
Less: Fixed manufacturing costs	2,160,000.00	2,160,000.00
Gross Profit	2,520,000.00	4,600,000.00
Answer C
First Option
If production volume exceeds sales volume, the traditional costing gross profit will be higher than the variable costing gross profit.