Question

The table below has the costs for a specific period:

  

Cost item	Amount
Direct labour	$90,000
Direct material	$80,000
Advertising	$40,000
Factory supervision	$50,000
Sales Commission	$60,000
Depreciation, administrative office equipment	$5,000
indirect materials, factory	$7,000
Depreciation, factory building	$10,000
Administrative, office supplies	$3,000

Required:

1. What is the total period cost?
2. What is the total direct product cost?
3. What is the total indirect product cost?
4. From the cost items listed in the table above, list one indirect product cost which varies with the level of output.
5. Under variable costing, what is the average unit product cost for the specific period? Consider that during this specific period 1,000 units of only one type of product were manufactured.
6. Under absorption costing, what is the average unit product cost for the specific period? Consider that during this specific period 1,000 units of only one type of product were manufactured.
7. What is the underlying difference and implication between variable and absorption costing product per unit?   

Please solve 4, 5, 6, 7

Answer 1

4 - From the cost items listed in the table above, list one indirect product cost which varies with the level of output.

Ans - Indirect factory material is an indirect product cost which varies with the level of output. Advertising and Sales commissions are variable selling overhead therefore are Period cost and not product cost.

5 - Under variable costing, what is the average unit product cost for the specific period? Consider that during this specific period 1,000 units of only one type of product were manufactured.

Ans - Under variable costing companies treat their fixed manufacturing costs as period costs and variable manufacturing costs as product costs. which means that all fixed manufacturing cost are charged to expense in the P/L statement in the period received.

Cost item	Type of Expense	Variable Costing
Direct labour	Direct Cost	$     90,000.00
Direct material	Direct Cost	$     80,000.00
Advertising	Variable selling overhead	$                      -
Factory supervision	Fixed manufacturing overhead	$                      -
Sales Commission	Variable selling expense	$                  -
Depreciation, administrative office equipment	Fixed administration cost	$                  -
indirect materials, factory	Variable Manufacturing Overhead	$       7,000.00
Depreciation, factory building	Fixed manufacturing overhead	$                  -
Administrative, office supplies	Variable administration cost	$                  -
	= Total Product Cost	$      177,000.00
	÷Total Unit Produced	÷1000
	average unit product cost	$              177.00

6 - Under absorption costing, what is the average unit product cost for the specific period? Consider that during this specific period 1,000 units of only one type of product were manufactured.*Since Advertising expense is a selling overhead it does not form part of product cost

Ans - Under absorption costing, companies treat all manufacturing costs, including both fixed and variable manufacturing costs, as product costs. However, all the selling costs are charged to expense.

Cost item	Type of Expense	Absorption Costing
Direct labour	Direct Cost	$            90,000.00
Direct material	Direct Cost	$            80,000.00
Advertising	Variable selling overhead	$ -
Factory supervision	Fixed manufacturing overhead	$            50,000.00
Sales Commission	Variable selling expense	$                         -
Depreciation, administrative office equipment	Fixed administration cost	$                         -
indirect materials, factory	Variable Manufacturing Overhead	$              7,000.00
Depreciation, factory building	Fixed manufacturing overhead	$            10,000.00
Administrative, office supplies	Variable administration cost	$                         -
	= Total Product Cost	$              237,000.00
	÷Total Unit Produced	÷1000
	=Average unit product cost	$                      245.00

7 - What is the underlying difference and implication between variable and absorption costing product per unit?

Ans - The underlying difference between the absorption costing and variable costing methods is the treatment of fixed manufacturing overhead costs and presentation of income statement. Under Absorption costing fixed manufacturing cost form part of product cost whereas under variable costing fixed manufacturing cost does not form part of product cost and is charges to income statement as expense.

The implication due to this difference can be substantial if the sold quantity is different to produced quantity. Under variable costing fixed manufacturing cost is charged to income statement in the specific period. However, under absorption costing this cost would be deffered if the sold quantity is less than produced quantity in the specific period resulting in higher net profit than under variable costing for that period.