Chapter 21, Problem 1TI

Pierce Company had the following costs:

Calculate the unit product cost using absorption costing and variable costing.

To determine

Compute the unit product cost using absorption costing and variable costing.

Explanation of Solution

Absorption Costing: “Absorption costing is a method that allocates “direct labor, direct materials, fixed manufacturing overhead and variable manufacturing overhead” to products and it is required by GAAP for the purpose of external reporting”.

Variable Costing: “Variable costing is a method that allocates only variable manufacturing costs to products; “direct labor, direct materials and variable manufacturing overhead” and it is used for internal reporting”.

Cost per unit: Cost per unit is the cost incurred by the company for producing one unit of product. The unit cost is computed by dividing the units produced with the total cost.

Calculate the unit product cost using absorption costing and variable costing:

Particulars	Absorption costing	Variable costing
Direct Materials	$25	$25
Direct labor	$45	$45
Variable manufacturing overhead	$15	$15
Fixed manufacturing overhead	(1)$10
Total unit cost	$95	$85

Table (1)

Therefore the total unit cost under absorption costing is $95 and the total unit cost under variable costing is $85.

Working note:

(1)Calculate the amount of fixed manufacturing overhead:

$\begin{array}{c}\text{Fixed}\text{manufacturing}\text{overhead}\text{=}\frac{\text{Fixed}\text{manufacturing}\text{overhead}\text{per}\text{year}}{\text{Number}\text{of}\text{units}\text{produced}}\\ \text{=}\frac{\text{\$5,000}}{500\text{units}}\\ \text{=}\text{\$10}\end{array}$