Chapter 6, Problem 1MCQ

To determine

Absorption Costing:

In absorption costing, all the costs of production are absorbed by or assigned to all the units of production. In simple words, all the direct costs or overheads costs incurred while manufacturing the products whether variable or fixed will be included in the final product cost.

To identify: The correct option.

Explanation of Solution

Option c., $14 is the correct answer.

Given,
Units produced are 1,000.
Under variable costs:
Direct materials are $3 per unit.
Direct labor is $5 per unit.
Variable overhead is $3 per unit.
Variable selling and administrative is $1 per unit.
Fixed overhead is $3,000 total.
Fixed selling and administrative is $1,000 total.

Absorption Costing
Product cost per unit
Particulars	Amount per unit ($)
Direct materials	3
Direct labor	5
Variable overhead	3
Fixed overhead (working note)	3
Product cost per unit	14

Table(1)

Working note:

Calculation of fixed overhead per unit,
$\begin{array}{c}\text{Fixed overhead per unit}=\frac{\text{Total fixed overhead }}{\text{Units produced}}\\ =\frac{\$3,000}{\text{1,000 units}}\\ =\$3\text{ per unit}\text{.}\end{array}$

Hence, $14 is product cost per unit by absorption costing.