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Appendix 5A: Variable Costing 5-* Learning objective number 5 is to explain how variable costing differs from absorption costing and compute unit product costs under each method. 5-* Absorption costing treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. The cost of a unit of product consists of direct materials, direct labor, and both variable and fixed overhead. Variable and fixed selling and administrative expenses are treated as period costs and are deducted from revenue as incurred. Variable costing treats only those costs of production that vary with output as product costs. The cost of a unit of product consists of direct materials, direct labor, and variable overhead. Fixed manufacturing overhead, and both variable and fixed selling and administrative expenses are treated as period costs and deducted from revenue as incurred. 5-* To answer this question correctly, recall which method includes more manufacturing costs in the unit product cost. 5-* Unit product costs are in both work in process and finished goods inventories. Absorption costing results in the highest inventory values because it treats fixed manufacturing overhead as a product cost. Using variable costing, fixed manufacturing overhead is expensed as incurred and never becomes a part of the product cost. 5-* Assume Harvey Company produces a single product with available information as shown. 5-* The unit product costs under absorption and variable costing would be $16 and $10, respectively. Under absorption costing, all production costs, variable and fixed, are included when determining unit product cost. Under variable costing, only the variable production costs are included in product costs. 5-* Learning objective number 6 is to prepare income statements using both variable and absorption costing. 5-* The Harvey Company example continued (additional assumptions): 20,000 units were sold during the year. The selling price per un