Murphy Inc., which produces a single product, has provided the following data for its most recent month of operation:

Number of units produced 10,500
Variable costs per unit:
Direct materials $ 165
Direct labor $ 72
Variable manufacturing overhead $ 8
Variable selling and administrative expenses $ 9
Fixed costs:
Fixed manufacturing overhead $ 535,500
Fixed selling and administrative expenses $ 199,500
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.

Part a. Compute the unit product cost under absorption costing.

Variable costs per unit:

        Direct materials                                                                         $ 165

         Direct labor                                                                                $ 72

         Variable manufacturing overhead                                            $ 8

Fixed Overheads per unit:

       Fixed manufacturing overhead ($535,500/10,500)                  $ 51

Unit product cost                                                                                $296

Part b. Compute the unit product cost under variable costing.

Variable costs per unit:

        Direct materials                                                                         $ 165

         Direct labor                                                                                $ 72

         Variable manufacturing overhead                                            $ 8

Unit product cost                                                                                $245

Explanation:

Part a. Compute the unit product cost under absorption costing.

Absorption costing treats fixed overheads as part of product cost and hence fixed manufacturing overheads are included in unit product cost at their absorption rate

Part b. Compute the unit product cost under variable costing.

Variable Costing System treats fixed overheads as a Period Cost and not part of product cost hence fixed manufacturing overheads are excluded in unit product cost

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