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Chapter 21: Q6SE (page 1168)

Computing absorption cost per unit and variable cost per unit

Adamson, Inc. has the following cost data for Product X:

Direct materials $ 41 per unit Direct labor 57 per unit Variable manufacturing overhead 7 per unit Fixed manufacturing overhead 20,000 per year

Calculate the unit product cost using absorption costing and variable costing when production is 2,000 units, 2,500 units, and 5,000 units.

Short Answer

Expert verified

Answer

  • Total unit product cost under absorption costing is $115, $113, $109 for production 2,000, 2,500, 5,000 respectively.
  • Total unit product cost under variable costing is $105, $105, $105 for production 2,000, 2,500, 5,000 respectively.

Step by step solution

01

Calculation of unit product cost using absorption costing

Particulars

2,000

Units

2,500

Units

5,000

Units

Direct material

$41

$41

$41

Direct labor

$57

$57

$57

Variable manufacturing overhead

$7

$7

$7

Fixed manufacturing overhead

$20,000/2,000

=$10

$20,000/2,500

=$8

$20,000/5,000

=$4

Total unit product cost

$115

$113

$109

02

Calculation of unit product cost using variable costing

Particulars

2,000

Units

2,500

Units

5,000

Units

Direct material

$41

$41

$41

Direct labor

$57

$57

$57

Variable manufacturing overhead

$7

$7

$7

Total unit product cost

$105

$105

$105

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Most popular questions from this chapter

Sampson Company operates a manufacturing facility where several products are made. Each product is considered a business segment, and the product managers have the opportunity to receive a bonus based on the profit of the segment. Franco Hopper is the manager for the scissors product line. Production and sales data for the scissors product line for the past three years are shown below:

Year 1 Year 2 Year 3 Units produced 100,000 units 125,000 units 160,000 units Units sold 100,000 units 100,000 units 100,000 units Sales price per unit \( 12.00 per unit \) 12.00 per unit $ 12.00 per unit Variable manufacturing cost per unit 5.00 per unit 5.00 per unit 5.00 per unit Total fixed manufacturing costs 200,000 per year 200,000 per year 200,000 per year

Hopper’s bonus is 0.5% of the gross profit of the scissors product line, based on absorption costing. Upper management is discussing changing the bonus system so that bonuses are based on operating income using variable costing. Hopper is opposed to this change and has been trying to convince the other product managers to join him in voicing their opposition. There are no beginning inventories in Year 1.

Requirements:

  1. Calculate the fixed cost per unit produced for each year.
  2. Prepare income statements for the three years using absorption costing.
  3. Calculate Hopper’s bonus based on the current plan.
  4. Prepare income statements for the three years using variable costing.
  5. Calculate Hopper’s bonus based on the proposed plan.
  6. Give possible reasons why Hopper is opposed to the proposed bonus plan. Do you think Hopper’s actions have been ethical the past three years? Why or why not?

Preparing variable and absorption costing income statements

Game Source manufactures video games that it sells for \(43 each. The company uses a fixed manufacturing overhead allocation rate of \)5 per game. Assume all costs and production levels are exactly as planned. The following data are from Game Store’s first two months in business during 2018:

October November Sales 1,500 units 2,900 units Production 2,500 units 2,500 units Variable manufacturing cost per game \( 17 \) 17Sales commission cost per game 7 7Total fixed manufacturing overhead12,500 12,500

Total fixed selling and administrative costs 11,500 11,500 Requirements

1. Compute the product cost per game produced under absorption costing and under variable costing.

2. Prepare monthly income statements for October and November, including columns for each month and a total column, using these costing methods:

a. absorption costing.

b. variable costing.

3. Is operating income higher under absorption costing or variable costing in October? In November? Explain the pattern of differences in operating income based on absorption costing versus variable costing.

4. Determine the balance in Finished Goods Inventory on October 31 and November 30 under absorption costing and variable costing. Compare the differences in inventory balances and the differences in operating income. Explain the differences in inventory balances based on absorption costing versus variable costing.

Question: Preparing variable costing income statements, production exceeds sales

ReVitalAde produced 13,000 cases of powdered drink mix and sold 12,000 cases in April 2018. The sales price was \(29, variable costs were \)12 per case (\(9 manufacturing and \)3 selling and administrative), and total fixed costs were \(100,000 (\)91,000 manufacturing overhead and $9,000 selling and administrative). The company had no beginning Finished Goods Inventory.

Requirements:

  1. Prepare the April income statement using variable costing.
  2. Determine the product cost per unit and the total cost of the 1,000 cases in Finished Goods Inventory as of April 30.

Question: Using variable costing, service company

Divine Pool Cleaning Service provides pool cleaning services to residential customers. The company has three employees, each assigned to specific customers. The company considers each employee’s territory as a business segment. The company incurs variable costs that include the employees’ wages, pool chemicals, and gas for the service vans. Fixed costs include depreciation on the service vans. Following is the income statement for the month of August:

Requirements

1. Calculate the contribution margin ratio for each business segment.

2. The business segments had the following number of customers: Byson, 80; Moore, 50; and Freeman, 110. Compute the service revenue per customer, variable cost per customer, and contribution margin per customer for each business segment.

3. Which business segment was most profitable? List some possible reasons why this segment was most profitable. How might the various reasons affect the company in the long term?

Hayden Company has 50 units in Finished Goods Inventory at the beginning of the accounting period. During the accounting period, Hayden produced 150 units and sold 200 units for \(150 each. All units incurred \)80 in variable manufacturing costs and \(20 in fixed manufacturing costs. Hayden also incurred \)7,500 in Selling and Administrative Costs, all fixed. Calculate the operating income for the year using absorption costing and variable costing.
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