Super Bike Manufacturing Company presents the following data for 2011:
|Opening inventory||0 Units|
|Closing inventory||2,000 Units|
|Variable manufacturing overhead expenses||$100|
|Variable selling and administrative expenses||$40|
|Fixed manufacturing overhead expenses||$1200,000|
|Fixed selling and administrative expenses||$800,000|
Required: Compute the unit product cost of one bike under:
- Absorption costing system.
- Variable costing system.
Computation of unit product cost:
|Absorption costing||Variable costing|
|Variable manufacturing overhead||$100||$100|
|Fixed manufacturing overhead||$120*||—|
|Unit product cost||$740||$620|
|*1,200,000 / 10,000 = $120|
Notice that the fixed manufacturing overhead cost has not been included while computing the cost of one bike under variable costing system.
Note: Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost.