Question

Question 4: Inventory Valuation

Suggested time: 15 minutes

MAP One makes maple syrup in Canada. In 2019 it made 220,000 400gr bottle of syrups and sold 190,000 of them, at an average selling price of $25 per unit. The following additional information relates to Athabasca Auto for 2019:

Direct Materials	$10.00 per unit
Direct manufacturing labour	$2.00 per unit
Variable manufacturing costs	$4.00 per unit
Sales commissions	$3.00 per unit
Fixed manufacturing costs	$750,000 per year
Fixed administrative expenses	$270,000 per year

What is Athabasca Auto manufacturing cost per unit using:

a. Variable costing system (7 marks)

b. Absorption costing system (8 marks)

Answer 1

a) $16

manufacturing cost under variable costing:

in variable costing method,we take only variable costs related to manufacturing and assume the fixed costs are period costs.Only include product costs in the calculation: direct materials, direct manufacturing labor and variable manufacturing costs.sales commision is a non manufacturing variable expenses,so it will not included in the calculations.fixed administration expense is a non manufacturing fixed cost ,it will also not included in the calculation.

so, manufacturing cost per unit=$10+$2+$4=$16

b) $19.40

manufacturing cost under absorption costing:

in absorption costing method,we will take both variable and fixed manufacturing costs.the costs included in the calculation is direct material,direct manufacturing labour,variable manufacturing cost and fixed manufacturing cost.sales commision is a non manufacturing variable expenses,so it will not included in the calculations.fixed administration expense is a non manufacturing fixed cost ,it will also not included in the calculation.

fixed manufacturing cost should be allocated to the number of units produced instead of number of units sold.Using units produced will allow overhead to be allocated to all of the units.

units produced during the year is 220000 units.

fixed manufacturing cost per unit=$750000/220000=$3.40

note:the figure is rounded upto 2 decimal point

so, manufacturing cost per unit=$10+$2+$4+$3.40=$19.40