Murphy Inc., which produces a single product, has provided the following data for its most recent month of operation: Number of units produced 12,700 Variable costs per unit: Direct materials $ 89 Direct labor $ 80 Variable manufacturing overhead $ 2 Variable selling and administrative expenses $ 17 Fixed costs: Fixed manufacturing overhead $ 622,300 Fixed selling and administrative expenses $ 254,000 The company had no beginning or ending inventories. Required: a. Compute the unit product cost under absorption costing. b. Compute the unit product cost under variable costing.

a. Unit Product Cost under Absorption Costing is $220.

b. Unit Product Cost under Variable Costing is $171.

Explanation:

Unit Product Cost means how much of Cost has been incurred to product a single unit of Product. We are required to compute Unit Product Cost under Two Costing Methods: Absorption Costing and Variable Costing.

Before calculating the requirement, lets differentiate between these two:

Absorption Costing

It considers Direct Material, Direct Labor, Variable Manufacturing Overhead, and Fixed Manufacturing Overhead as Product Costs and Selling & Administrative Expenses as Period Costs.

Variable Costing

This method does not Fixed Manufacturing Overhead as Product Cost and treat it as a Period Cost.

Calculations:

a. Unit Product Cost under Absorption Costing

Direct Material                                                                                  $89

Direct Labor                                                                                        80

Variable Manufacturing Overhead                                                     2

Fixed Manufacturing Overhead (622,300/12,700)                          49

Unit Product Cost                                                                          $220

b. Unit Product Cost under Variable Costing

Direct Material                                                                                  $89

Direct Labor                                                                                        80

Variable Manufacturing Overhead                                                     2

Unit Product Cost                                                                          $171

in 2001, dell computer became the world’s largest personal computer vendor, continuing to

gain market share and post profits in an industry struggling with slumping sales and billions of

dollars in losses. dell sells 90% of its pcs directly to the final customer, largely bypassing the

reseller channel that accounts for most of the world’s pc sales. this direct customer relationship

is the key to dell’s business model, and provides distinct advantages over the indirect sales

model. dell’s direct relationship with the customer allows it to tailor its offerings to customer

needs, offer add-on products and services, and use the internet to offer a variety of customer

services. in addition, dell’s pcs are built to customers’ specifications upon receipt of an order,

giving dell additional advantages over indirect pc vendors who must try to forecast demand and

ship products based on those forecasts. dell’s direct sales and build-to-order model has achieved

superior performance in the pc industry in terms of inventory turnover, reduced overhead, cash

conversion, and return on investment (kraemer, et al., 2000).

explanation: