Question

***If you are able to explain how you got the results it would really help me. Thank you!***

I LOPP P7-3A. Variable and Absorption Costing Scott Manufacturing makes only one product with total unit manufacturing costs of $54, of which $40 is variable. No units were on hand at the beginning of 2010 During 2019 and 2020, the only product manufactured was sold for $65 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 2019 and 2020: Units Manufactured Units Sold 2019....... 90,000 110,000 110,000 2020...... 120,000 Required a. Prepare gross profit computations for 2019 and 2020 using absorption costing. b. Prepare gross profit computations for 2019 and 2020 using variable costing. c. Explain how your answers illustrate the impact of differences between production and sall umes on the gross profits reported each year under absorption and variable costing. P7-4A. Variable and A

Answer 1

Step 1: Calculation of Total Fixed Costs: Total Units Produced 110000 $40.00 Variable Cost Per Unit Total Cost Per Unit $54.00 Total Fixed Costs = Total Cost - Total Variable Cost = (110,000 x $54)-(110,000 x $40) = $1,540,000.00 Step 2: Calculation of Unit Product Cost Under Absorption Costing: Unit Product Cost Under Absorption Costing is sum of unit Variable Manufacturing Cost and Unit Fixed Manufacturing Cost = $54.00 Step 3: Calculation of Unit Product Cost Under Variable Costing: Unit Product Cost Under Variable Costing is Total Unit Variable Manufacturing Cost. (We should not include fixed manufacturing Cost ) = $40.00

a. Preparation of Gross Profit Computation for 2019 and 2020 Using Absorption Costỉng: 2019 2020 Total Units Sold 90000 120000 2$ Unit Selling Price 65.00 $ 65.00 $54.00 Unit Product Cost $54.00 Total Sales (90000x$65;120000x$65) 5,850,000.00 $ 7,800,000.00 Less: Cost of Goods Sold (90000x$54;120000x$54) (4,860,000.00) $ (6,480,000.00) 990,000.00 $ 1,320,000.00 2$ Gross Profit

b. Preparation of Gross Profit Computation for 2019 and 2020 Using Variable Costing: 2019 2020 Total Units Sold 90000 120000 Unit Selling Price Unit Product Cost 2$ 65.00 $ 65.00 $40.00 $40.00 Total Sales $ 5,850,000.00 $ (90000x$65;120000x$65) Less: Cost of Goods Sold 7,800,000.00 (3,600,000.00) $ (90000x$40;120000x$40) Gross Profit 2$ (4,800,000.00) 2,250,000.00 $ 3,000,000.00 2$ c. Explanation for impact due to differences between production and sales volume on Gross Profit under Absorption Costing and Variable Costing: The Difference between Gross Profit under Absorption Costing and Variable Costing is only due to Fixed Manufacturing Cost included in Ending Inventory.