Lily's Pastries produces cupcakes, which sell for $5 each. During the current month, Lily produced 2,800 cupcakes, but only sold 2,700 cupcakes. The variable cost per cupcake was $3 and the sales commission per cupcake was $0.50. Total fixed manufacturing costs were $1,400 and total fixed marketing and administrative costs were $1,200. What is the product cost per cupcake under absorption costing

$3.50

Explanation:

Absorption Costing is a Costing Method that takes into account all the Manufacturing Cost of a product (that is Variable Manufacturing Costs and Fixed Manufacturing Costs) to determine Product Cost.

Any other costs (Non - Manufacturing)  are regarded as Period costs to be expensed in the Income Statement. Examples of Period Costs are Administrative Costs, Sales Commissions and Adverting Costs

Calculation of Product Cost per cupcake under absorption costing

Product Cost = VC + FC

                      =  $3 + $1,400/ 2,800

                      = $3.50