The total product cost per unit under absorption costing is calculated as follows: - Units produced: 1,000 - Direct materials: $6 per unit - Direct labor: $10 per unit - Fixed overhead: $6,000 total - Variable overhead: $6 per unit - Fixed selling and administrative expenses: $2,000 total - Variable selling and administrative expenses: $2 per unit To determine the total product cost per unit, we need to divide the total fixed costs by the number of units produced and add the variable costs per unit. Fixed costs per unit: - Fixed overhead per unit = $6,000 / 1,000 units = $6 per unit - Fixed selling and administrative per unit = $2,000 / 1,000 units = $2 per unit Total fixed costs per unit = $6 (fixed overhead) + $2 (fixed selling and administrative) = $8 per unit Variable costs per unit: - Direct materials = $6 per unit - Direct labor = $10 per unit - Variable overhead = $6 per unit - Variable selling and administrative = $2 per unit Total variable costs per unit = $6 (direct materials) + $10 (direct labor) + $6 (variable overhead) + $2 (variable selling and administrative) = $24 per unit Total product cost per unit = Total fixed costs per unit + Total variable costs per unit = $8 + $24 = $32 per unit.
Answered on
The total product cost per unit under absorption costing is calculated by adding both total variable costs and allocated fixed costs per unit. For the given scenario:
1. Firstly, we need to calculate the allocated fixed overhead per unit, which is the total fixed overhead divided by the number of units produced: $$ Fixed overhead per unit = \frac{Total Fixed Overhead}{Units Produced} = \frac{$6,000}{1,000} = $6 per unit $$
2. Then, calculate the allocated fixed selling and administrative expenses per unit in the same manner: $$ Fixed selling and administrative per unit = \frac{Total Fixed Selling and Administrative Expenses}{Units Produced} = \frac{$2,000}{1,000} = $2 per unit $$
3. Now, add these allocated per-unit costs to determine the total fixed costs per unit: $$ Total fixed costs per unit = Fixed overhead per unit + Fixed selling and administrative per unit = $6 + $2 = $8 per unit $$
4. Next, add up all the variable costs per unit (which do not need allocation, as they are already calculated on a per-unit basis): $$ Total variable costs per unit = Direct materials + Direct labor + Variable overhead + Variable selling and administrative expenses = $6 + $10 + $6 + $2 = $24 per unit $$
5. Finally, add the total fixed costs per unit to the total variable costs per unit to find the total product cost per unit under absorption costing: $$ Total product cost per unit = Total fixed costs per unit + Total variable costs per unit = $8 + $24 = $32 per unit $$
Therefore, the total product cost per unit under absorption costing is $32.
Extra: In accounting, specifically in costing methodologies, absorption costing (also known as full costing) is a method that includes all of the manufacturing costs in the cost of a product. This includes both variable costs (which change with the level of production, such as raw materials and direct labor) and fixed costs (which remain constant regardless of the level of production, such as rent and insurance).
Absorption costing follows the GAAP (Generally Accepted Accounting Principles) guidelines for financial reporting. It is particularly useful for external reporting because it provides a more comprehensive view of the costs of producing goods.
Under absorption costing, the cost of a product is composed of: - Direct materials: The raw materials that are directly traceable to the product. - Direct labor: The wages for the workers who are directly involved in the production of the product. - Variable overhead: Costs that vary with production levels, such as utility costs for machines. - Fixed overhead: Costs that are generally constant regardless of production levels, such as salaries for administrative staff and depreciation on factory equipment.
Selling and administrative expenses are often treated as period costs and are not included in the product cost under traditional absorption costing; they are expensed in the period incurred. However, in some absorption costing calculations, like the example provided, these costs may also be allocated per unit for a comprehensive analysis of profitability or for internal decision-making purposes.
Understanding the total product cost per unit is essential for setting the selling price, as the selling price must cover both the cost of production and any markup for profit. It is also used for inventory valuation and in determining the cost of goods sold on the income statement.