Question

Madrid Corporation has compiled the following information from the accounting system for the one product it sells. Sales price $900 per unit Fixed costs (for the month) Marketing and administrative $108,000 Manufacturing overhead $162,000 Variable costs (per unit) Marketing and administrative $18 Direct materials $270 Manufacturing overhead $60 Direct labor $165 Units produced and sold (for the month) 1,800

Determine each of the following unit costs: a . Variable manufacturing cost. b . Variable cost. c . Full absorption cost. d . Full cost.

write 3-4 sentences interpreting the results of the solution provided

Answer 1

Solution

Madrid Corporation

Determination of each of the following unit costs:

a. Variable manufacturing cost

Variable manufacturing cost comprises

Direct materials           $270

Direct labor                 $165

MOH                           $60

Total variable manufacturing cost per unit = $495

b. Variable cost:

Variable cost

Variable cost comprises

Direct materials           $270

Direct labor                 $165

MOH                           $60

Marketing and admin cost $18

Total variable cost per unit = $513

c. Full absorption cost:

Full manufacturing cost:

manufacturing cost comprises:

Direct materials           $270

Direct labor                 $165

Variable MOH            $60

Fixed MOH                $90

Total absorption costing = $585

Note – fixed manufacturing overhead cost per unit = $162,000/1,800 = $90

d. Full cost:

Full cost –

.

manufacturing cost comprises

Direct materials           $270

Direct labor                 $165

MOH, variable            $60

Fixed MOH                $90

Marketing and admin cost $18

Full cost per unit = $603

Interpretation of results –

1. Variable costs are costs that change value in total with changes in unit sales. The variable costs are constant at unit level and vary at whole amounts. Fixed cost are costs that do not change with changes in sales, but remain constant throughout the period.

2. Variable manufacturing cost per unit $495 would remain constant at the unit level but would vary with changes in units sales. Also, variable cost per unit would remain constant at unit level

3. Full absorption costing comprises all direct cost – direct material, direct labor and variable manufacturing, regardless of fixed or variable in nature.