Super Bike Manufacturing Company presents the following data for 2011:

Opening inventory 0 Units
Sales 8,000 Units
Production 10,000 Units
Closing inventory 2,000 Units
Direct materials $240
Direct labor $280
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:

  1. Absorption costing system.
  2. Variable costing system.

Solution:

Computation of unit product cost:

Absorption costing Variable costing
Direct materials $240 $240
Direct labor $280 $280
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.