Question

Making Company manufactures one product that is sold for $40 per unit in two geographic regions—the South and North regions. The following information pertains to the company’s first year of operations in which it produced 20,000 units and sold 17,500 units.

Variable costs per unit:          

Manufacturing:        

    Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             $12

    Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                $7

    Variable manufacturing overhead. . . . . . . . . . . . . . . . . . . .           $1

Variable selling and administrative. . . . . .. . . . . . . . . . . . . . .          $2

Fixed costs per year:

    Fixed manufacturing overhead. . . . . . . . . . . . . . . . . . . . . . .          $400,000

    Fixed selling and administrative expenses. . . . . . . . . . . . . . . .      $248,000

The company sold 12,500 units in the South region and 5,000 units in the North region. It determined that $125,000 of its fixed selling and administrative expenses is traceable to the North region, $75,000 is traceable to the South region, and the remaining $48,000 is a common fixed cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.

Required:

What is the unit product cost under variable costing?

What is the unit product cost under absorption costing?

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Answer 1

Calculation of Unit product cost under variable costing

Under variable costing, variable manufacturing costs are considered as product cost and fixed costs are considered as period costs. In the given case, only variable costs (i.e. direct materials, direct labor and variable manufacturing overhead) will be included in unit product cost.

Unit product cost under variable costing = Direct materials+Direct labor+Variable manuf. OH

= $12+$7+$1 = $20 per unit

Therefore, unit product cost under variable costing is $20 per unit

Calculation of Unit product cost under Absorption Costing

Under absorption costing, both variable manufacturing costs and fixed manufacturing costs are considered as product costs. Fixed manufacturing overheads are divided by the total units produced for calculating fixed manufacturing overheads per unit of output.

Fixed manufacturing OH per unit = Total Fixed Manufacturing OH/Total units produced

= $400,000/20,000 units = $20 per unit

Unit product cost under absorption costing = Variable manufacturing cost+Fixed Manuf OH per unit

= $20+$20 = $40 per unit

Therefore, unit product cost under absorption costing is $40 per unit