Question

Ida Company produces a handcrafted musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $982. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		19,000
Units sold		16,000
Units in ending inventory		3,000
Variable costs per unit:
Direct materials	$	270
Direct labor	$	470
Variable manufacturing overhead	$	63
Variable selling and administrative	$	18
Fixed costs:
Fixed manufacturing overhead	$	750,000
Fixed selling and administrative	$	710,000

Required:

1. Assume that the company uses absorption costing. Compute the unit product cost for one gamelan. (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

2. Assume that the company uses variable costing. Compute the unit product cost for one gamelan.

Answer 1

SOLUTION

CASE 1 :-

Assume that the company uses absorption costing , compute the unit product cost for one gamelan

UNDER ABSORPTION COSTING, ALL MANUFACTURING COST (VARIABLE & FIXED ) ARE INCLUDED IN COST OF PRODUCTION

Direct Material		$270
Direct Labour		$470
Variable Manufacturing Overhead		$63
Fixed Manufacturing Overhead	$750,000/19,000	$39
		$842

CASE 2 :-

Assume that the company uses variable costing compute the unit product cost for one gamelan

UNDER VARIABLE COSTING , ONLY VARIABLE MANUFACTURING COST ARE INCLUDED IN COST OF PRODUCT

Direct Material		$270
Direct Labour		$470
Variable Manufacturing Over head		$63
		$803

Note

Variable & Fixed Selling and Administrative Expenses are included in case of Cost to Sales

It is asked in the question Cost of Production so only Manufacturing Overhead is included

In case of Fixed Manufacturing or Selling & Administrative Overhead , Fixed cost is allocated for full production capacity, because if there is production or not fixed cost is payable