Question

On December 31, the end of the first year of operations, Frankenreiter Inc. manufactured 28,000 units and sold 26,600 units. The following income statement was prepared, based on the variable costing concept:

Frankenreiter Inc.

Variable Costing Income Statement

For the Year Ended December 31, 20Y1

1	Sales		$11,704,000.00
2	Variable cost of goods sold:
3	Variable cost of goods manufactured	$6,720,000.00
4	Inventory, December 31	(336,000.00)
5	Total variable cost of goods sold		6,384,000.00
6	Manufacturing margin		$5,320,000.00
7	Total variable selling and administrative expenses		1,155,000.00
8	Contribution margin		$4,165,000.00
9	Fixed costs:
10	Fixed manufacturing costs	$1,400,000.00
11	Fixed selling and administrative expenses	890,000.00
12	Total fixed costs		2,290,000.00
13	Income from operations		$1,875,000.00

Determine the unit cost of goods manufactured, based on (a) the variable costing concept and (b) the absorption costing concept.

Answer 1

In variable costing only variable costs of production will make up the manufacturing cost per unit. All Fixed manufacturing cost is treated as a period cost On the other hand if we talk about absorption costing variable manufacturing cost and fixed manufacturing cost are added to make cost per unit. Fixed manufacturing cost is distributed too all goods produced.

Requirement (a)

Cost per unit as per Variable costing
	Total (A)	Units sold (B)	Per unit cost (C=A/B)
Variable cost of goods manufactured	$ 63,84,000.00	26600	$ 240.00

Requirement (b)

Cost per unit as per Absorption costing
	Total (A)	Units (B)	Per unit cost (C=A/B)
Variable cost of goods manufactured	$ 63,84,000.00	26600	$ 240.00
Fixed manufacturing Overheads	$ 14,00,000.00	28000	$    50.00
Total Manufacturing cost per unit			$ 290.00