Super Bike Manufacturing Company presents the following data for year 2016:
- 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: Using the data given above, compute the unit product cost of one bike under:
- absorption costing system.
- variable costing system.
Computation of unit product cost:
*1,200,000 / 10,000 = $120
The cost to manufacture one bike is $740 under absorption costing system and $620 under variable costing system.
Notice that the fixed manufacturing overhead cost has not been included while computing the cost of one bike under variable costing system.
Note for students: Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost.