Variable and Absorption Costing

Frances Manufacturing makes a product with total unit manufacturing cost of $$64,$ of which $$36$ is variable. No units were on hand at the beginning of Year $1.$ During Year $1$ and Year $2,$ 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 Year $1$ and Year $2$:

Units ManufacturedUnits SoldYear $190,00070,000$ Year $290,000100,000$

a$.$ Prepare gross profit computations for Year $1$ and Year $2$ using absorption costing.

Do not use negative signs with your answers.

Absorption CostingYear $1$Year $2$SalesAnswer $1$Answer $2$Cost of goods sold:Beginning inventoryAnswer $3$Answer $4$ProductionAnswer $5$Answer $6$Goods availableAnswer $7$Answer $8$Less: Ending inventoryAnswer $9$Answer $10$Cost of goods soldAnswer $11$Answer $12$Gross profitAnswer $13$Answer $14$

b$.$ Prepare contribution margin computations for Year $1$ and Year $2$ using variable costing.

Do not use negative signs with your answers.

Variable CostingYear $1$Year $2$SalesAnswer $15$Answer $16$Variable cost of goods sold:Beginning inventoryAnswer $17$Answer $18$ProductionAnswer $19$Answer $20$Goods availableAnswer $21$Answer $22$Less: Ending inventoryAnswer $23$Answer $24$Variable cost of goods soldAnswer $25$Answer $26$Less: Fixed manufacturing costsAnswer $27$Answer $28$Gross profitAnswer $29$Answer $30$

c$.$ Explain how your answers illustrate the impact of differences between production and sales volumes on the gross profits reported each year under absorption and variable costing.

Select the most appropriate statement.

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

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

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

If sales volume exceeds production volume, the variable costing gross profit will be lower than the absorption costing gross profit.