Skinny Dippers, Inc., produces nonfat frozen yogurt which it sells to restaurant

Question

Skinny Dippers, Inc., produces nonfat frozen yogurt which it sells to restaurants and ice cream shops. The product is sold in 10-gallon containers, which have the following price and variable costs. Sales price Direct material Direct labor Variable $58 20 14 14 overhead Budgeted fixed overhead in 20x4, the company's first year of operations, was $1,080,000. Actual production was 180,000 10-gallon containers, of which 171,000 were sold. Skinny Dippers, Inc. incurred the following selling and administrative expenses. Fixed $360,000 for the year per 1container sold Variable $ Required: . Compute the per unit product cost per container of frozen yogurt under variable costing and absorption costing. Per unit product cost Variable costing Absorption costing

Explanation / Answer

1

Product cost under absorption costing:

Product cost under absorption costing includes direct materials, direct labor, and manufacturing overhead including fixed portion.

Product cost under absorption costing is:

Fixed manufacturing overhead under absorption costing per unit is calculated based on total production then allocated to cost of goods sold and inventory as below:

product cost under variable costing:

Under variable costing product cost includes direct material, direct labor and variable manufacturing overhead.

Fixed manufacturing overhead is considered period cost under variable costing.

Note: Selling expenses and administrative expenses both fixed and variable portions are considered period costs (expensed in the period incurred) under both absorption costing and variable costing.

2 a

2 b

Note: A reconciliation of why there is a difference in net profit under above two methods is given for your reference.

* Please comment, if further explanation is required. Your rating is appreciated*

Product cost under absorption costing is:
Particulars Amount Direct materials 20 Direct labor 14 Variable manufacturing overhead 14 Fixed manufacturing overhead 6 Product cost per unit 54

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