Question

Dennison Corporation has provided the following information:

Direct Materials      $6.00 per unit

Direct Labor            $3.00 per unit

Variable MOH         $2.00 per unit

Sales Commission   $1.00 per unit

Variable Administrative expenses $0.50

Total Fixed MOH         $10,000

Total Fixed Selling and administrative expenses   $5,000

5,000 units were produced and 4,900 units were sold. There was no beginning inventory.

ANSWER THE FOLLOWING QUESTIONS

1. What is the unit product cost under variable costing?

2. What is the unit product cost under absorption costing?

3. Which method of product costing will show a higher net operating income under the circumstances above, and by how much?

4. Explain how you arrived at your answer.

Answer 1

WORKING NOTES : 1
	beginning Inventory	-	Units
	Unit Produced =	5,000	Units
	Unit Sold =	4,900	Units
	Closing Stock	100	Units
	Fixed Overhead recovery Rate =
	Fixed Manufacturing Overhead expenses	$                       10,000
	Divide by	"/" By
	Number of units Produced	$                          5,000
	Fixed Overhead recovery Rate =	$                            2.00	Per Units
Solution: 1
	Calculation of cost of production units by using variable Costing
	Particulars	Variable Costing Amount
	Direct Material Per unit	$                            6.00
	Direct Labour Per Unit	$                            3.00
	Vairable Manufacturing Overhead	$                            2.00
	Variable Administrative Expenses	$                            0.50
	Cost of Production per unit as per variable Costing	$                          11.50
	Answer = $ 11.50
Solution: 2
	Calculation of cost of production units by using Absorption Costing
	Particulars	Absorption Costing Amount
	Direct Material Per unit	$                            6.00
	Direct Labour Per Unit	$                            3.00
	Vairable Manufacturing Overhead	$                            2.00
	Variable Administrative Expenses	$                            0.50
	Fixed Manufacturing Overhead	$                            2.00
	Cost of Production per unit as per Absorption Costing	$                          13.50
	Answer = $ 13.50
Solution: 3
	Absoption costing is higher production cost due to fixed manufacruring overhead expenses taken in costing
	There is ending inventory of 100 Units so cost of ending inventory is higher in absorption costing and due to
	this cost of goods sold is lower in absorption and profit is at higer site in absorption costing
	Ending inventory	100	Units
	Fixed overhead per unit involved in ending inventory	$                                  2	Per Unit
	Excess profit in Absorption costing = (100 Units X $ 2)	$                             200
	Answer = $ 200
Solution: 4
	In absorption costing fixed overhead is taken as product cost but in variable costing only variable cost is taken
	as product cost excluding the variable sales expenses or sales commission expenses