Abigail Corporation produces a custom mountain bike that sells for $800. During

Question

Abigail Corporation produces a custom mountain bike that sells for $800. During its first year of operations, Abigail produced 1,000 bikes and sold 900 bikes.

The costs of production for each bike are:
Direct materials $100
Direct labor $50
Variable Overhead $30

Additionally, the annual fixed overhead is $200,000.

Determine the following:
1. How many bikes were in the inventory at the end of the year?
2. What is the product cost of one bike using the variable costing method?
3. What is the product cost of one bike using the full costing method?
4. Under variable costing, are fixed overhead costs a product cost or a period cost?

Explanation / Answer

(1)
Inventory = Total production - total sales = 1000 - 900 = 100

(2)
Variable cost of each bike = variable overhead + labor + material = 30 + 50 + 100 = 180

(3)
Total cost of each bike = variable cost + fixed overhead per bike = 180 + (total fixed over head/total bikes produced) = 180 + (200000/1000) = 180 + 200 = 380

(4)
Under variable costing, all variable costs are treated as inventory costs and all fixed costs are treated as period costs. So fixed overhead cost is a period cost.

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