Question

Exercise 7-6 Variable and Absorption Costing Unit Product Costs and Income Statements [LO7-1, LO7-2]

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	$	4
Variable manufacturing overhead	$	2
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	370,000
Fixed selling and administrative	$	200,000

During the year, the company produced 37,000 units and sold 18,000 units. The selling price of the company’s product is $55 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

1a
Direct materials	12
Direct labor	4
Variable manufacturing overhead	2
Fixed manufacturing overhead	10		=370000/37000
Unit product cost	28
b
Absorption Costing Income Statement
Sales	990000		=18000*55
Cost of goods sold	504000		=18000*28
Gross margin	486000
Selling and administrative expenses	236000		=200000+(18000*2)
Net operating income (loss)	250000
2a
Direct materials	12
Direct labor	4
Variable manufacturing overhead	2
Unit product cost	18
b
Variable Costing Income Statement
Sales		990000	=18000*55
Variable expenses:
Variable Cost of goods sold	324000		=18000*18
Variable Selling and administrative expenses	36000		=18000*2
		360000
Contribution margin		630000
Fixed expenses:
Fixed manufacturing overhead	370000
Fixed Selling and administrative expenses	200000
		570000
Net operating income (loss)		60000