Question

Fresh Air Products manufactures and sells a variety of camping products. Recently the company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data for the first month of operations are shown below:

Beginning inventory 0 units

Units produced 10,700

Units sold 8,900

Manufacturing costs

Fixed overhead $128,400

Variable overhead $6 per unit

Direct labour $12 per unit

Direct material $25 per unit

Selling and administrative costs

Fixed $207,400

Variable $4 per unit sold

The portable cooking unit sells for $110. Management is interested in the opening month’s results and has asked for an income statement. Assuming the company uses absorption costing: (a)

a) Calculate the manufacturing cost per unit.

Answer 1

Ans.a	Manufacturing cost per unit   = $55
	Particulars	Amount
	Direct materials	25
	Direct labor	12
	Variable overhead	6
	Fixed overhead	12
	Total manufacturing cost per unit	55
	*Fixed overhead per unit = Fixed manufacturing overhead / NO. of units produced
	128400 / 10700
	12
	*In absorption costing all manufacturing costs (variable + fixed) are added
	in the calculation of unit product cost. The income statement using absorption costing method is also provided here.
	Absorption costing Income statement
	Particulars		Amount
	Sales (8900*110)		979000
	Less: Cost of goods sold:
	Opening inventory	0
	Add: Cost of goods manufactured (10700*55)	588500
	Cost of goods available for sale	588500
	Less: Ending inventory [(10700-8900)*55]	-99000	489500
	Gross profit		489500
	Less: Variable selling and administrative expense (8900*4)		-35600
	Less: Fixed Selling and Administrative expenses		-207400
	Net operating income		246500