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2 January, 14:00

Variable and Absorption Costing Scott Manufacturing makes only one product with total unit manufacturing costs of $56, of which $38 is variable. No units were on hand at the beginning of 2015. During 2015 and 2016, the only product manufactured was sold for $87 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.

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  1. 2 January, 14:23
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    Gross profit computations for 2015 and 2016 using absorption costing

    2015 2016

    Sales $7,830,000 $11,310,000

    Less Cost of Goods Sold ($5,040,000) ($7,280,000)

    Opening Stock 0 $1,680,000

    Add Cost of Manufacture $6,720,000 $6,720,000

    Less Closing Stock ($1,680,000) ($1,120,000)

    Gross Profit $2,790,000 $4,030,000

    Explanation:

    Absorption Costing Product Cost = Direct Material + Direct Labor + Variable Overheads + Fixed Overheads

    Gross profit computations for 2015 and 2016 using absorption costing

    2015 2016

    Sales $7,830,000 $11,310,000

    Less Cost of Goods Sold ($5,040,000) ($7,280,000)

    Opening Stock 0 $1,680,000

    Add Cost of Manufacture $6,720,000 $6,720,000

    Less Closing Stock ($1,680,000) ($1,120,000)

    Gross Profit $2,790,000 $4,030,000

    2015

    Cost of Manufacture = $56*120,000 = $6,720,000

    Closing Stock = $56 * (120,000-90,000) = $1,680,000

    2016

    Cost of Manufacture = $56*120,000 = $6,720,000

    Closing Stock = $56 * (30,000+120,000-130,000) = $1,120,000
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