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Exercise 06-2 Computing unit and inventory costs under variable costing LO P1 Trio Company reports the following information for the current year, which is its first year of operations. Assume instead that Trio Company uses variable costing. Direct materials $15 per unit Direct labor $16 per unit Overhead costs for the year Variable overhead $4 per unit Fixed overhead $160,000 per year Units produced this year 20,000 units Units sold this year 14,000 units Ending finished goods inventory in units 6,000 units1. Compute the product cost per unit using variable costing. Cost per unit of finished goods using: Variable costing Cost per unit of finished goods 2. Determine the cost of ending finished goods inventory

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Answer:

Trio Company

1. Using Variable Costing:

a. Product Cost per unit = $35 (see below)

b. Cost per unit of finished goods = $35 (see below)

2. Using variable cost, the cost of ending finished goods inventory = 6,000 * $35 = $210,000

b. Using total cost, the cost of ending finished goods inventory =

6,000 * $43 = $258,000

Explanation:

a) Calculation of Costs:

                              Cost per unit            Total Costs

Direct materials        $15                          $300,000

Direct labor                 $16                        $320,000

Variable overhead       $4                          $80,000

Total Variable             $35                       $700,000

Fixed Cost                    $8                        $160,000

Total Cost                  $43                       $860,000

b) Cost of Goods sold 14,000 x $43 = $602,000 using total cost per unit.

c) Cost of Goods sold 14,000 x $35 = $490,000 using variable cost per unit.

d) Variable costing is a method of assigning only variable costs to a product while the fixed overheads are treated as period expenses.

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