Question 8.1: A sports equipment manufacturer makes two types of balls: so...
A sports equipment manufacturer makes two types of balls: soccer balls and footballs. There is no beginning inventory, and during the year the manufacturer makes 20,000 soccer balls and 40,000 footballs. Indirect manufacturing costs during the year are $100,000. During the year, all the soccer balls are sold and 30,000 of the footballs are sold. The company is considering two possible methods of allocating indirect manufacturing costs. The first method allocates $80,000 to the soccer balls and $20,000 to the footballs. The second method allocates $40,000 to the soccer balls and $60,000 to the footballs. Which method causes a higher reported profit this period?
10,000/40,000 or 25 percent of the footballs are not yet sold. Therefore, indirect manufacturing costs associated with the unsold footballs remain an asset. They are not a deduction from profits. Under the first method, 25 percent of the manufacturing overhead of $20,000, or $5,000, is not deducted from profits in the current period. Under the second method, 25 percent of $60,000, or $15,000, is not deducted. Therefore, the second method causes reported profits to be $15,000 – $5,000, or $10,000 higher