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	$	3
Variable manufacturing overhead	$	1
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	330,000
Fixed selling and administrative expenses	$	240,000

During the year, the company produced 30,000 units and sold 23,000 units. The selling price of the company’s product is $43 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

Construct The Absorption Costing Unit Product Cost
				Year 1
Direct Material				11
Direct labour				3
Variable Manufacturing overheads				1
Fixed Manufacturing overheads				11.00	(330000/30000 units)
Absorption costing unit prroduct cost				26.00
Construct the Absorption Costing Income Statement Under FIFO
				Year 1
Sales				$989,000
Cost of Goods sold				598000
Gross Margin				$391,000
Selling and distribution expense				263,000
Net operating income				128,000
Compute the Variable costing Unit Product cost
				Year 1
Direct Material				11
Direct labour				3
Variable Manufacturing overheads				1
Variable costing unit prroduct cost				15
Construct The Variable Costing Income Statement under FIFO
				YEAR 1
Sales					989,000
Less: Variable cost
variable cost of goods sold				345,000
Variable selling expense				23,000	368,000
Contribution margin					621,000
Fixed expense:
Fixed Manufacturing overheads					330,000
Fixed selling expense					240,000
Net operating Income					51,000