Help on this HW question please and thank you: Matt Corporation produces a singl
ID: 2448548 • Letter: H
Question
Help on this HW question please and thank you:
Matt Corporation produces a single automotive part for a luxury car maker and has the following cost structure:
Number of units produced each year
4,000
Variable costs per unit:
Direct materials
$80
Direct labor
$82
Variable manufacturing overhead per unit
$2
Variable selling and administrative expenses per unit
$3
Fixed costs per year:
Fixed manufacturing overhead
$176,000
Fixed selling and administrative expenses
$316,000
Required:
a. Compute the unit product cost under absorption costing. Show your work.
b. Compute the unit product cost under variable costing. Show your work.
c. If you are a public corporation, which method must you use? Why?
d. In your opinion, which is better? Why?
Number of units produced each year
4,000
Variable costs per unit:
Direct materials
$80
Direct labor
$82
Variable manufacturing overhead per unit
$2
Variable selling and administrative expenses per unit
$3
Fixed costs per year:
Fixed manufacturing overhead
$176,000
Fixed selling and administrative expenses
$316,000
Explanation / Answer
a. Absorption costing :
per unit
Direct materials $80
Direct labour $82
Variable Manufacturing overhead $ 2
Variable selling overhead $ 3
-------
Total variable cost per unit $167
--------
Total Fixed cost
---manufacturing overhead $176000
--selling and administrative $316000
-------------
Total fixed overhead $ 492000 A
---------------
Units produced 4000 B
Fixed cost per unit $123 per unit A /B
Total unit cost = variable cost per unit + fixed cost per unit
=$ 167+$123
= $290 per unit.
b.Unit product cost under variable costing is $167 ; see the workings above.
c.In a public corporation ,normally the absorption costing is used because in variable costing the inventory does not include the fixed cost and therefore it results understatement of profit resulting in less payment of tax ; this is again objected by tax authorities since in variable costing the inventory value is less because of exclusion of fixed cost .
d.For decision making purposes, like whether any division or product line should be continued or not , variable costing is used since variable costing varies with sales.; fixed costing is excluded in decision making because whether any division or product line is continued or not,fixed cost is not considered because of its nature being a fixed cost .but for reporting the net operating income, fixed cost should be included in the ending inventory which results less cost of goods sold and thereby resulting in higher profit ; this is appraised by tax authorities because of higher payment of tax ;
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