Question

Variable and Absorption Costing
Scott Manufacturing makes only one product with total unit manufacturing costs of $60, of which $42 is variable. No units were on hand at the beginning of 2015. During 2015 and 2016, the only product manufactured was sold for $95 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

	Units Manufactured	Units Sold
2015	120,000	90,000
2016	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		Answer		Answer
Cost of goods sold:
Beginning inventory		Answer		Answer
Production		Answer		Answer
Goods available		Answer		Answer
Less: Ending inventory		Answer		Answer
Cost of goods sold		Answer		Answer
Gross profit		Answer		Answer

b. Prepare gross profit computations for 2015 and 2016 using variable costing.
Do not use negative signs with your answers.

Variable Costing
		2015		2016
Sales		Answer		Answer
Variable cost of goods sold:
Beginning inventory		Answer		Answer
Production		Answer		Answer
Goods available		Answer		Answer
Less: Ending inventory		Answer		Answer
Variable cost of goods sold		Answer		Answer
Less: Fixed manufacturing costs		Answer		Answer
Gross profit		Answer		Answer

c. Explain how your answers illustrate the impact of differences between production and sales volumes on the gross profits reported each year under absorption and variable costing.
Select the most appropriate statement.

If production volume exceeds sales volume, the absorption costing gross profit will be higher than the variable costing gross profit.

If sales volume exceeds production volume, the absorption costing gross profit will be higher than the variable costing gross profit.

If production volume exceeds sales volume, the variable costing gross profit will be higher than the absorption costing gross profit.

If sales volume exceeds production volume, the variable costing gross profit will be lower than the absorption costing gross profit.

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

Answer 2 Part 1) 2015 8550000 2016 12350000 4 Sales 5 Cost of goods sold 6 Beginning inventory 7 Production (120000*60) 3 Goods available 9 Less Ending inventory 0 Cost of goods sold 1 Gross Profit 7200000 7200000 1800000 5400000 3150000 1800000 7200000 9000000 1200000 7800000 4 550000 3 Ending inventory for 2015 = units * unit cost 4 = (120000-90000)*60 5 = $ 180000 7 Ending inventory for 2016 = units * unit cost 8 = (30000+120000-130000) * 60 9 = $ 120000

0 21 part 2) Variable Costing 2015 2016 24 Sales 8550000 12350000 25 Variable cost of goods sold 26 Beginning inventory 1260000 27 Production 5040000 5040000 28 Goods available (120000*42) 5040000 6300000 29 Less: Ending inventory 1260000 840000 30 Variable cost of goods sold 3780000 5460000 31 Less: Fixed Manufacturing Costs (*18*120000) 2160000 2160000 32 Gross Profit 2610000 4730000 34 Cost of ending inventory for 2015 = unit * unit cost 35 = (120000-90000)*42 36 = $ 1260000 38 Cost of ending inventory 2016 = unit * unit cost 39 = ( 30000+120000-130000) *42 10 = $ 840000 12 Part 3) 13 The correct answer is If Production volume exceeds sale volume, the aborption costing gross profit will 14 be higher than the variable costing gross profit. 16 Explaination 17 This is because value of closing stock increases in this case as compared to variable costing, as it can be seen in above created statements.