Polk Company builds custom fishing lures for sporting goods stores. In its first year of
operations, 2012, the company incurred the following costs.
Variable Cost per Unit
Direct materials $8.10
Direct labor $2.65
Variable manufacturing overhead $6.21
Variable selling and administrative expenses $4.21
Fixed Costs per Year
Fixed manufacturing overhead $255,252
Fixed selling and administrative expenses $259,308
Solution
Variable costing is a technique where total cost is divided into two groups. They are fixed cost
and variable cost.
Fixed cost does not change with the change in output. Most of these cost elements are
contractually fixed. Example, Rent of factory premises.
Variable cost like material cost is directly linked with the quantity produced. Increase in
production will mean increase in total variable cost.
In variable costing total variable cost is deducted from sales. Result is contribution. From
contribution fixed cost is deducted to get net profit.
Thus variable costs are considered as manufacturing cost. Closing and opening stocks are valued
on this basis. Fixed costs are considered as periodic cost. It is deducted from total contribution to
get profit or loss.
Therefore in this problem manufacturing cost will only include variable costs. It is shown below-
On the basis of calculation profitability statement of 2012 is shown below-

Result: Manufacturing cost per unit is $21.17
Elements of cost Cost per unit
1. Direct material $8.10
2. Direct labor $2.65
3. Variable manufacturing overhead $6.21
4. Variable selling & distribution overhead $4.21
5. Total variable cost (Manufacturing cost ) (1+2+3+4) $21.17