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In: Accounting

Frances Manufacturing makes a product with total unit manufacturing costs of $64, of which $36 is...

Frances Manufacturing makes a product with total unit manufacturing costs of $64, of which $36 is variable. No units were on hand at the beginning of 2015. During 2015 and 2016, the only product manufactured was sold for $96 per unit, and the cost structure did not change. Frances uses the first-in, first-out inventory method and has the following production and sales for 2015 and 2016:

Units Manufactured

Units Sold

2015

100,000

70,000

2016

100,000

120,000
  1. Prepare gross profit computations for 2015 and 2016 using absorption costing.
  2. Prepare gross profit computations for 2015 and 2016 using variable costing.

Solutions

Expert Solution

a) Gross Profit using Absorption Costing:

Income statement (Absorption Costing) 2015 2016
Sales 6720000 11520000
Less: Cost of goods sold 4480000 7680000
          Opening 0 1920000
          Add: Units Manuf. 6400000 6400000
          Less: Closing Inventory 1920000 640000
Gross Margin 2240000 3840000

b) Gross Profit using Variable Costing:

Income statement (Variable Costing) 2015 2016
Sales 6720000 11520000
Less: Cost of goods sold 2520000 4320000
          Opening 0 1080000
          Add: Units Manuf. 3600000 3600000
          Less: Closing 1080000 360000
Contribution Margin 4200000 7200000

Working Notes:

2015 2016
Units Produced 100000 100000
Units Sold 70000 120000
Cost per Unit under Variable costing 36 36
Cost per Unit under Absorption costing 64 64
(Variable cost + Fixed prod cost/Units producted)
Ending Inventory using Variable costing 1080000 360000
(Closing Inventory*Cost per unit under variable costing)
Ending Inventory using Absorption costing 1920000 640000
(Closing Inventory*Cost per unit under variable costing)
Calculation of closing inventory:
Opening 0 30000
Add) Produced 100000 100000
Less) sold 70000 120000
Closing 30000 10000

ekkarill92 answered 2 years ago
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