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# Variable and Absorption Costs

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Sharpens Incorporated produces knife sets for use in commercial kitchens. They sell for \$400.00 each.

Selected data for the company's operations last year follow below.

Units in beginning inventory 0
Units produced 3000
Units sold 2500
Units in ending inventory 500

Variable cost per unit
Direct materials \$120.00
Direct labor 80
Variable manufacturing overhead 40
Variable selling and administrative 20

Fixed costs
Fixed manufacturing overhead \$ 300,000
Fixed selling and administrative \$ 200,000

a. Assume that the company uses variable costing, compute the unit cost for one knife set? (Show all work)
b. Assuming that the company uses absorption costing, compute the unit cost for one knife set. (Please show all work so I am able to learn this stuff)

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#### Solution Preview

Dear student,

Variable cost per unit is \$340, while absorption cost per unit is \$360. However, please take a look at the attached Excel for a full breakdown of the solutions.

1 Data used in the problem
Selling price \$400
Units in beginning inventory 0
Units produced 3000
Units sold 2500
Units in ending inventory 500
Variable costs per unit:
Direct materials \$120
Direct labor \$80
Variable manufacturing overhead \$40
Variable selling and administrative \$20
Fixed manufacturing overhead \$300,000
Fixed selling and administrative \$200,000

2 Statement of unit cost analysis under Variable and absorption costing.
Variable costing Absorption
Direct material \$120 \$120
Direct labour \$80 \$80
Variable manufacturing overhead \$40 \$40
Fixed Factory Overhead ...

#### Solution Summary

The expert examines variable and absorption costs for company's operations.

\$2.49