Absorption costing treats all production costs as product costs, regardless of whether they are variable or fixed. Thus the product cost per unit consists of direct materials, direct labor, and variable and fixed overhead. So the calculation of absorption costs allocates a portion of the fixed factory overhead into each unit of product, along with variable overhead costs. Since the calculation of absorption costs involves all production costs, this method is often referred to as the full cost method.
b. Calculation of variable costs (variable costing), only production costs that vary according to the output which are treated as product costs. This includes direct materials, direct labor, and variable factory overheads. Fixed factory overheat costs are not treated as product costs in this method. Conversely, factory overhead costs are treated as periodic costs, as administrative and sales expenses, these expenses are charged in full into revenue each period. Consequently, the cost per unit of product in inventory or in cost of goods sold in the variable cost calculation method is often referred to as direct cost calculation ( direct costing) or calculating marginal cost (marginal costing).
2). Requested:
1. Assume that the company uses variable financing. Calculate the unit production cost for the cake.
2. Assume that the company uses variable financing. Prepare an income / loss statement for the year using the contribution format.
3. How much food must be sold to break even point.
The answer is:
1. Variable cost per unit product cost
Direct materials 50
Direct labor 80
Variable factory overhead 20
Production cost per unit $ 150
2. Sales: (19,000 x 210) 3,990. 000
Less variable
Hpp variable expenses
Initial inventory 0
Dtmh; cost of goods manufactured
(20,000 × 150) 3,000,000
Goods available for sale 3,000,000
Dkrng: ending inventory
(1000 x 150) 150,000
variable hp 2,850,000
Variable sales and administration materials
(19,000 x 10) 190,000
3,040,000
Contribution margin 950,000
Deducted fixed expenses 700,000
Fixed plant overhead 285,000 Fixed
selling and administrative expenses 985,000
Loss (35,000)
- Break-even point
Selling price per unit 210
Variable costs per unit (production and sales) 160
Contribution margin per unit 50
Fixed plant overhead
costs 700,000 Administration and sales
costs 285,000 Total fixed costs 985,000
Total fixed costs 985,000 Break-
even point = 985,000 / 50 = 19,700 unit
