Exercise-1 (Unit product cost under variable and absorption costing)

By: Rashid Javed | Updated on: September 7th, 2022

Super Bike Manufacturing Company presents the following data for year 2022:

  • 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:

  1. absorption costing system.
  2. variable costing system.

Solution:

Computation of unit product cost:

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.

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