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	$	12
Direct labor	$	6
Variable manufacturing overhead	$	3
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	276,000
Fixed selling and administrative	$	186,000

During the year, the company produced 23,000 units and sold 19,000 units. The selling price of the company’s product is $50 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

Answer-1-a)- Unit product cost under Absorption costing= $33 per unit.

Explanation- Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$12+$6+$3+$12

= $33 per unit

Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$276000/23000 units

=$12 per unit

b)-

Lynch Company
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	19000 units*$50 per unit		950000
Less:- Cost of goods sold (b)
Opening inventory
Add:- Cost of goods manufactured		759000
Direct materials	23000 units*$12 per unit	276000
Direct labor	23000 units*$6 per unit	138000
Variable manufacturing overhead	23000 units*$3 per unit	69000
Fixed manufacturing overhead		276000
Cost of goods available for sale		759000
Less:- Closing inventory	4000 units*$33 per unit	132000	627000
Gross margin C= a-b			323000
Less:-Variable selling & administrative exp.	19000 units*$3 per unit		57000
Less:- Fixed costs
Selling & administrative exp.			186000
Net Income			80000

2-a)- Unit product cost under Variable costing= $21 per unit.

Explanation-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$12+$6+$3

= $21 per unit

b)-

Lynch Company
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	19000 units*$50 per unit		950000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		483000
Direct materials	23000 units*$12 per unit	276000
Direct labor	23000 units*$6 per unit	138000
Variable manufacturing overhead	23000 units*$3 per unit	69000
Variable cost of goods available for sale		483000
Less:- Closing inventory	4000 units*$21 per unit	84000	399000
Gross contribution margin C= a-b			551000
Less:-Variable selling & administrative exp.	19000 units*$3 per unit		57000
Contribution margin			494000
Less:- Fixed costs
Manufacturing overhead			276000
Selling & administrative exp.			186000
Net Income			32000