9,000 units sold (1,000 remain in ending finished goods inventory)įirst, we will calculate the variable cost product cost per unit: Direct Materials.Variable selling expenses $0.20 per unit.Now, let’s continue with our example Bradley Company.īradley Company had the following information for May: You should remember, the contribution margin income statement separates variable costs and fixed costs (whether product or period does not matter) and calculates a contribution margin (this is sales – variable costs). This contribution margin income statement would be used for internal purposes only.
The income statement we will use in not Generally Accepted Accounting Principles so is not typically included in published financial statements outside the company. Fixed overhead would not be included as a product cost! We calculate product cost per unit as: Direct Materials Product costs, under variable costing, includes the VARIABLE costs only like direct materials, direct labor and variable overhead. The following video explains the concepts in variable costing: Therefore, these fixed costs do not specifically relate to the manufacture of products. The logic behind this expensing of fixed manufacturing costs is that the company would incur such costs whether a plant was in production or idle. Under variable costing, companies treat only variable manufacturing costs as product costs. Variable costing (also known as direct costing) treats all fixed manufacturing costs as period costs to be charged to expense in the period received.
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