Sharpens Inc. produces knife sets for use in commercial kitchens. They sell them

Question

Sharpens Inc. produces knife sets for use in commercial kitchens. They sell them for $400 each. Selected data for the company's operations last year follow:
Units in beginning inventory 0
Units produced 3,000
Units sold 2,500
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 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 computations.
b. Assuming that the company uses absorptions costing, compute the unit cost for the one knife set. Show computations.

Explanation / Answer

(a) Under variable costing, the product is valued at variable production cost. Thus, unit cost for one knife set = 120 + 80 + 40 = $240 (b)Under absorption costing, we need to consider fixed manufacturing overhead into the product cost. Overhead absorption rate = 300,000/3000 = $100 per unit Thus, unit cost for one knife set = 120 + 80 + 40 + 100 = $340 Hope this helps!

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