Unit Product Cost: Videos & Practice Problems
Unit Product Cost focuses on which costs are attached to each unit of product under absorption costing and variable costing. In both methods, the unit product cost includes direct materials, direct labor, and variable manufacturing overhead. Selling and administrative costs are treated as period costs, so they are not part of unit product cost.
The key difference is fixed manufacturing overhead. Absorption costing includes fixed manufacturing overhead in product cost, while variable costing excludes it. This makes absorption costing unit cost higher whenever fixed manufacturing overhead is present. A central calculation is \( \text{Fixed manufacturing overhead per unit}=\frac{\text{Total fixed manufacturing overhead}}{\text{Units produced}} \) , which is then added only under absorption costing.
As a result, absorption costing assigns all manufacturing costs to units produced, while variable costing assigns only variable manufacturing costs. Variable costing relies on actual overhead data rather than predetermined overhead when determining unit product cost.
Calculating Unit Product Cost
Calculating Unit Product Cost
Calculate the product cost per unit under absorption costing.
20
22
24
26
Here's what students ask on this topic:
Absorption costing and variable costing differ primarily in how they treat fixed manufacturing overhead. Absorption costing includes all manufacturing costs—direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead—in the unit product cost. Fixed overhead is allocated per unit by dividing total fixed overhead by the number of units produced, as shown in the formula: . Variable costing, on the other hand, includes only variable manufacturing costs (direct materials, direct labor, and variable overhead) in the unit product cost and treats fixed overhead as a period cost, excluding it from the product cost. This results in absorption costing usually having a higher unit product cost than variable costing by the amount of fixed overhead allocated per unit.
To calculate the unit product cost under absorption costing, you add all manufacturing costs, including direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead allocated per unit. First, calculate the fixed overhead per unit by dividing total fixed overhead by the number of units produced: . Then, sum this with the variable costs per unit. For example, if direct materials cost \$1.50, direct labor \$1.00, variable overhead \$0.75, and fixed overhead per unit \$0.25, the total unit product cost is \$3.50. This method ensures all manufacturing costs are assigned to each unit produced.
Selling and administrative costs are excluded from unit product cost calculations because they are considered period costs, not product costs. Product costs are directly tied to the production process and include direct materials, direct labor, and manufacturing overhead. In contrast, selling and administrative expenses relate to activities outside of manufacturing, such as marketing and office management, and are expensed in the period incurred. Therefore, these costs do not get assigned to individual units and are excluded from both absorption and variable costing unit product cost calculations.
Fixed overhead is the key factor causing the difference in unit product cost between absorption and variable costing. Absorption costing assigns fixed manufacturing overhead to each unit by dividing total fixed overhead by the number of units produced, adding this amount to the unit product cost. Variable costing excludes fixed overhead from the unit product cost, treating it as a period expense instead. As a result, absorption costing typically shows a higher unit product cost by the fixed overhead amount allocated per unit. For example, if fixed overhead is \$25,000 and 100,000 units are produced, the fixed overhead per unit is \$0.25, which increases the absorption costing unit product cost by that amount compared to variable costing.
Variable costing relies on actual overhead data because it includes only variable manufacturing costs in the unit product cost, and fixed overhead is treated as a period cost. Unlike absorption costing, which can use predetermined overhead rates to allocate fixed overhead to units, variable costing requires the true, actual variable overhead costs incurred during production to accurately calculate the unit product cost. This ensures that the variable costing method reflects the real costs of production without estimating fixed overhead, providing a more precise measure of variable manufacturing costs per unit.
