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	$	350,000
Fixed selling and administrative	$	260,000

During the year, the company produced 35,000 units and sold 25,000 units. The selling price of the company’s product is $46 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

1
a.	Under Absorption Costing
	Unit product cost:
	Direct Material	$               11
	Direct Labor	$                  5
	Variable Manufaturing overhead	$                  2
	Total Variable Cost	$               18
	Fixed Manufacturing overhead ($350000/35000)	$               10
	Unit product cost	$               28
b.	Absorbtion Costing Income Statement
	Sales(25000 X $46)	$ 11,50,000
Less:	Cost of Goods Sold (25000 X $28)	$   7,00,000
	Gross Margin	$   4,50,000
Less:	Selling and Administrative expenses [(25000 X $2) + $260000]	$   3,10,000
	Net Operating Income	$   1,40,000
2
a.	Under Variable Costing
	Unit product cost:
	Direct Material	$               11
	Direct Labour	$                  5
	Varialble Manufaturing overhead	$                  2
	Unit product cost	$               18
b.	Variable Costing Income Statement
	Sales(25000 X $46)		$ 11,50,000
	Variable Cost of goods sold (25000 X $18)	$   4,50,000
Less:	Variable Selling and Administrative expenses (25000 X $2)	$       50,000	$   5,00,000
	Contribution margin		$   6,50,000
Less:	Fixed Expenses:
	Fixed Manufacturing overhead	$   3,50,000
	Fixed Selling and Administrative expenses	$   2,60,000	$   6,10,000
	Net operating Income		$       40,000