Absorption & Variable Costing Example

Maxwell Company manufactures and sells a single product. The following costs were incurred during the company's first year of operations: Variable costs per unit: Manufacturing : Direct materials $18, Direct labor $7, Variable manufacturing overhead $2, Variable selling and administrative $5, Fixed costs per year $160,000, Fixed selling and administrative expenses $110,000. During the year, the company produced 20,000 units and sold 16,000 units. The selling price of the company's product is $50 per unit.

1. Assume that the company uses absorption costing:
a. Compute the unit product cost.
b. Prepare an income statement for the year.

2. Assume that the company uses variable costing:
a. Compare the unit product cost.
b. Prepare an income statement for the year.

Solution Summary

The solution computes product cost per unit based on absorption as well as variable costing methods.