Question

Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations: Variable costs per unit: Manufacturing: Direct materials $ 11 Direct labor $ 5 Variable manufacturing overhead $ 2 Variable selling and administrative $ 2 Fixed costs per year: Fixed manufacturing overhead $ 264,000 Fixed selling and administrative $ 174,000 During the year, the company produced 22,000 units and sold 18,000 units. The selling price of the company’s product is $45 per unit. Required: 1. Assume that the company uses absorption costing: a. Compute the unit product cost. b. Prepare an income statement for the year. 2. Assume that the company uses variable costing: a. Compute the unit product cost. b. Prepare an income statement for the year.

Answer 1

Hi...

1. Absorption Costing:

1.1. Calculation of unit product Cost

Particulars                                                    Amount

Direct Material $ 11

Direct Labor $ 5

Variable Manufacturing Overhead $ 2

Fixed Manufacturing Overhead*   $ 12

Unit Product Cost $ 30

*264,000 / 22,000 units = $12  

1.2. Income Statement

Particulars                                                    Amount

Sales (18000 units * $45)                         $ 810,000

Less: Cost of goods manufactured*   ($ 540,000)

Gross Profit                                                $ 270,000    

Less: Expenses

Selling and Administrative Expenses

Variable (18,000 units* $2) ($ 36,000)

Fixed                                                         ($ 174,000)

Net Operating Income $ 60,000                              

*Cost of goods manufactured = 18000 units * $ 30 unit product cost = $ 540,000

2. Variable Costing

2.1. Calculate Unit Product Cost

Particulars                                                    Amount

Direct Material    $ 11

Direct Labor $ 5

Variable Manufacturing Overhead $ 2

Unit Product Cost                                       $ 18

           

2.2. Income Statement

Particulars                                                    Amount

Sales (18000 units * $45)                         $ 810,000

Less: Cost of goods manufactured* ($ 324,000)

Gross Profit                                                  $ 486,000    

Less: Expenses

Fixed Manufacturing Overhead ($ 264,000)

Selling and Administrative Expenses

Variable (18,000 units* $2)                     ($ 36,000)

Fixed                                                          ($ 174,000)

Net Operating Income                              $ 12,000      

*Cost of goods manufactured = 18000 units * $ 18 unit product cost = $ 324,000