Ida Company produces a handcrafted musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $789. Selected data for the company’s operations last year follow:

Units in beginning inventory	0
Units produced	23,000
Units sold	20,000
Units in ending inventory	3,000
Variable costs per unit:	 
Direct materials	$ 150
Direct labor	$ 450
Variable manufacturing overhead	$ 46
Variable selling and administrative	$ 15
Fixed costs:	 
Fixed manufacturing overhead	$ 750,000
Fixed selling and administrative	$ 510,000
Required:
Assume the company uses absorption costing. Compute the unit product cost for one gamelan.
Note: Round your intermediate calculations and final answer to the nearest whole dollar amount.

Assume the company uses variable costing. Compute the unit product cost for one gamelan.


To compute the unit product cost under both **absorption costing** and **variable costing**, we need to take into account how each method treats fixed manufacturing overhead.

### 1. Absorption Costing

In absorption costing, **all manufacturing costs** (both variable and fixed) are included in the unit product cost.

#### Formula for Absorption Costing Unit Product Cost:
\[
\text{Unit Product Cost} = \text{Variable Cost per Unit} + \frac{\text{Total Fixed Manufacturing Overhead}}{\text{Units Produced}}
\]

Let's break this down:

- **Variable Costs per Unit**:
  - Direct Materials: $150
  - Direct Labor: $450
  - Variable Manufacturing Overhead: $46

\[
\text{Total Variable Costs per Unit} = 150 + 450 + 46 = 646
\]

- **Fixed Manufacturing Overhead Allocation**:
  \[
  \frac{\text{Total Fixed Manufacturing Overhead}}{\text{Units Produced}} = \frac{750,000}{23,000} \approx 32.61
  \]

Now, the **Absorption Costing Unit Product Cost**:
\[
\text{Unit Product Cost} = 646 + 32.61 \approx 679
\]

So, under absorption costing, the unit product cost is **$679**.

---

### 2. Variable Costing

In variable costing, **only variable manufacturing costs** are included in the unit product cost. Fixed manufacturing overhead is treated as a period expense and is not allocated to individual units.

#### Formula for Variable Costing Unit Product Cost:
\[
\text{Unit Product Cost} = \text{Variable Cost per Unit}
\]

- **Variable Costs per Unit**:
  - Direct Materials: $150
  - Direct Labor: $450
  - Variable Manufacturing Overhead: $46

\[
\text{Total Variable Costs per Unit} = 150 + 450 + 46 = 646
\]

So, under variable costing, the unit product cost is **$646**.

---

### Summary of Results:
- **Absorption Costing Unit Product Cost** = **$679**
- **Variable Costing Unit Product Cost** = **$646**

Would you like more details or clarifications on any of the calculations?

---

Here are 5 related questions:
1. How would the absorption costing method affect profit if inventory levels change?
2. What happens to fixed manufacturing overhead in variable costing if units produced exceed units sold?
3. Can the unit product cost vary between two periods if fixed manufacturing overhead changes?
4. How does the treatment of selling and administrative expenses differ under absorption and variable costing?
5. How would net operating income differ between absorption and variable costing if production exceeds sales?

**Tip**: Absorption costing is often required for external financial reporting, while variable costing is commonly used for internal decision-making.

Ida Company produces a handcrafted musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $789. Selected data for the company’s operations last year follow:

Units in beginning inventory 0
Units produced 23,000
Units sold 20,000
Units in ending inventory 3,000
Variable costs per unit:
Direct materials $150
Direct labor $450
Variable manufacturing overhead $46
Variable selling and administrative $15
Fixed costs:
Fixed manufacturing overhead $750,000
Fixed selling and administrative $510,000
Required:
Assume the company uses absorption costing. Compute the unit product cost for one gamelan.
Note: Round your intermediate calculations and final answer to the nearest whole dollar amount.

Assume the company uses variable costing. Compute the unit product cost for one gamelan.

Learn how to compute the unit product cost for Ida Company's handcrafted gamelans using both absorption and variable costing. This problem involves cost accounting principles with detailed formulas for variable and fixed costs, suitable for accounting students.

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