Ross Corporation produces a single product. The company has direct materials costs of $8 per unit, direct labor costs of $6 per unit, and manufacturing overhead of $10 per unit. Sixty percent of the manufacturing overhead is for fixed costs. In addition, variable selling and administrative expenses are $2 per unit, and fixed selling and administrative expenses are $3 per unit at the current activity level. Assume that direct labor is a variable cost.Under absorption costing, the unit product cost is:
A) $24 per unit
B) $20 per unit
C) $26 per unit
D) $29 per unit

Question

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs, including fixed and variable costs, are allocated to the product. Therefore, the unit product cost is calculated as follows:

Direct materials cost per unit + Direct labor cost per unit + Variable manufacturing overhead cost per unit + (Fixed manufacturing overhead cost per unit x 60%) = Total manufacturing cost per unit

$8 + $6 + $10 + ($10 x 60%) = $8 + $6 + $10 + $6 = $30 per unit

Since variable selling and administrative expenses are $2 per unit and fixed selling and administrative expenses are $3 per unit, the total selling and administrative expenses are $5 per unit. Adding the total manufacturing cost per unit and the total selling and administrative expenses per unit gives:

$30 + $5 = $35 per unit

Therefore, the unit product cost under absorption costing is $35 per unit, which is divided by the number of units produced to calculate the cost of goods sold and determine the ending inventory value.

Alternatively, we can calculate the unit product cost using the following formula:

Unit product cost = Direct materials cost per unit + Direct labor cost per unit + Variable manufacturing overhead cost per unit + Fixed manufacturing overhead cost per unit + Variable selling and administrative expenses per unit + Fixed selling and administrative expenses per unit

$8 + $6 + $10 + ($10 x 60%) + $2 + $3 = $24 per unit

Ross Corporation Produces a Single Product