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 $       7 Variable manufacturing overhead $       2 Variable selling and administrative $       2 Fixed costs per year: Fixed manufacturing overhead $ 248,000 Fixed selling and administrative $ 158,000 During the year, the company produced 31,000 units and sold 21,000 units. The selling price of the company’s product is $44 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.

Lynch Company Variable Costing Income Statement Variable expenses: 0 0 Fixed expenses: 0 $0

Answer 1

Absorption Costing:

Unit product cost

Cost of goods sold:		Per unit Cost
Direct Material	21,000	12.00
Direct Labour	21,000	7.00
Variable manufacturing overhead	21,000	2.00
Annual fixed manufacturing overhead	21,000	8.00
Unit Product Cost		29.00

Income Statement

Lynch Company
Absorption Costing Income Statement
For the Year Ended 20XX
Particulars	Units	rate	Amount ($)
Sales	21,000	44	924,000
Less: Cost of goods sold:
Direct Material	21,000	12	252,000
Direct Labour	21,000	7	147,000
Variable manufacturing overhead	21,000	2	42,000
Annual fixed manufacturing overhead (248,000/31,000)	21,000	8	168,000
Gross Profit			315,000
Less: Selling and administrative expenses
Variable selling expenses	21,000	2	42,000
Fixed selling and administrative expense			158,000
Net operating Profit/loss			115,000

Variable Costing:

Lynch Company
Variable Costing Income Statement
For the Year Ended 20XX
Particulars	Units	Rate	Amount ($)
Sales	21,000	44	924,000
Variable expenses:
Variable cost of goods sold (12+7+2)	21,000	21	441,000
Variable selling and administrative	21,000	2	42,000
Contribution margin			441,000
Fixed expenses:
Fixed manufacturing overhead	248,000
Fixed selling and administrative	158,000		406,000
Net operating Profit/loss			35,000

Cost of goods sold:		Per unit Cost
Direct Material	21,000	12.00
Direct Labour	21,000	7.00
Variable manufacturing overhead	21,000	2.00
Unit Product Cost		21.00

Reconciliation

Particulars	Amount ($)
Net Income under absorption costing	115,000
Net income under variable costing	35,000
Difference	80,000
Difference is because of fixed manufacturing overhead	80,000
(10000*8)