Penna Corporation produces a single product and has the following cost structure

Question

Penna Corporation produces a single product and has the following cost structure: Number of units produced each year 1,000 Variable costs per unit:      Direct materials $40      Direct labor $16      Variable manufacturing overhead $1      Variable selling and administrative expenses $1 Fixed costs per year:      Fixed manufacturing overhead $12,000      Fixed selling and administrative expenses $34,000
Required:

a. Compute the unit product cost under absorption costing. Show your work! (5 points)

b. Compute the unit product cost under variable costing. Show your work! (5 points) Penna Corporation produces a single product and has the following cost structure: Number of units produced each year 1,000 Variable costs per unit:      Direct materials $40      Direct labor $16      Variable manufacturing overhead $1      Variable selling and administrative expenses $1 Fixed costs per year:      Fixed manufacturing overhead $12,000      Fixed selling and administrative expenses $34,000
Required:

a. Compute the unit product cost under absorption costing. Show your work! (5 points)

b. Compute the unit product cost under variable costing. Show your work! (5 points) Number of units produced each year 1,000 Variable costs per unit:      Direct materials $40      Direct labor $16      Variable manufacturing overhead $1      Variable selling and administrative expenses $1 Fixed costs per year:      Fixed manufacturing overhead $12,000      Fixed selling and administrative expenses $34,000

Explanation / Answer

a. ANSWER = $69/unit

Absorption costing means that all of the manufacturing costs are absorbed by the units produced. In other words, the cost of a finished unit in inventory will include direct materials, direct labor, and both variable and fixed manufacturing overhead.

Variable manufacturing costs are:

Direct Materials: $40/unit

Direct Labor: $16/unit

Variable Manufacturing Overhead: $1

Total: $57/unit

(DO NOT INCLUDE SELLING & ADMIN. COSTS BECAUSE THEY'RE NOT MANUFACTURING COSTS)

Fixed manufacturing overhead costs are:

$12,000 / 1000 units = $12/unit

(IGNORE FIXED SELLING AND ADMIN. EXP. BECAUSE THEY'RE NOT MANUFACTURING COSTS)

Variable Manufacturing Costs + Fixed Manufacturing Costs = Unit Product Cost Under Absorption

$57/unit + $12/unit = $69/unit

b. ANSWER = $57/unit

Under variable or direct costing, the fixed manufacturing overhead costs are not allocated or assigned to (not absorbed by) the products manufactured.

Variable manufacturing costs are:

Same as above: $57/unit

Fidex Manufacturing costs are:

IGNORED UNDER VARIABLE COSTING

Variable manufacturing costs = unit product cost under variable costing

$57/unit = unit product cost under variable costing

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