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.

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