Question

Variable and Absorption Costing Scott Manufacturing makes only one product with total unit manufacturing costs of $57, of which $39 is variable. No units were on hand at the beginning of 2015. During 2015 and 2016, the only product manufactured was sold for $89 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 90,000 20,000 130,000 2015 120,000 2016 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 8010000 $11,570,00 1,710,000 Production 6,840,000 6,840,000 Goods available 6,840,000 8,550,000 Less: Ending inventory 1,710,000 1,140,000 Cost of goods sold 5,130,000 7,410,000

Answer 1

a.

Absorption Costing
	2015	2016
Sales	8010000	11570000
Cost of goods sold:
Beginning inventory	0	1710000
Production	6840000	6840000
Goods available	6840000	8550000
Less: Ending inventory	1710000	1140000
Cost of goods sold	5130000	7410000
Gross profit $	2880000	4160000

b.

Variable Costing
	2015	2016
Sales	8010000	11570000
Variable cost of goods sold:
Beginning inventory	0	1170000
Production	4680000	4680000
Goods available	4680000	5850000
Less: Ending inventory	1170000	780000
Variable cost of goods sold	3510000	5070000
Less: Fixed manufacturing costs	2160000	2160000
Gross profit $	2340000	4340000

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