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

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:

*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.