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 | $ | 14 |
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 | $ | 240,000 |
During the year, the company produced 33,000 units and sold 24,000 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.
Ans. 1 a | In Absorption costing method, the unit product cost is the sum of all manufacturing costs per unit | |||
whether it is fixed or variable. | ||||
Unit product cost under Absorption Costing: | ||||
Direct materials | $14.00 | |||
Direct labor | $3.00 | |||
Variable Overhead per unit | $1.00 | |||
Fixed overhead per unit ($330,000 / 33,000) | $10.00 | |||
Product Cost per unit | $28.00 | |||
*Fixed overhead per unit = Fixed overhead / Units produced | ||||
Ans. 1 b | Lynch Company | |||
Absorption Costing Income Statement | ||||
PARTICULARS | Amount | |||
Sales (24,000 * $44) | $1,056,000 | |||
Less: Cost of goods sold | ||||
Opening inventory | $0 | |||
Add: Cost of goods manufactured (33,000 * $28) | $924,000 | |||
Cost of goods available for sale | $924,000 | |||
Less: Ending inventory [(33,000 - 24,000) * $28] | -$252,000 | |||
Cost of goods sold (total) | $672,000 | |||
Gross margin | $384,000 | |||
Selling & Administrative expenses: | ||||
Fixed | $240,000 | |||
Variable (24,000 * $1) | $24,000 | |||
Total Selling and administrative expenses | $264,000 | |||
Net operating income | $120,000 | |||
*Ending inventory = (Units produced - Units sold) * Production cost per unit | ||||
Ans. 2 A | In variable costing method, the unit product cost is the sum of only variable | |||
manufacturing costs per unit | ||||
Unit product cost under Variable Costing: | ||||
Direct materials | $14.00 | |||
Direct labor | $3.00 | |||
Variable Overhead per unit | $1.00 | |||
Total production cost per unit | $18.00 | |||
Ans. 2 b | Lynch Company | |||
Variable Costing Income Statement | ||||
PARTICULARS | Amount | |||
Sales (24,000 * $44) | $1,056,000 | |||
Less: Variable cost of goods sold: | ||||
Opening inventory | $0 | |||
Add: Variable cost of goods manufactured (33,000 * $18) | $594,000 | |||
Variable cost of goods available for sale | $594,000 | |||
Less: Ending inventory [(33,000 - 24,000) * $18] | -$162,000 | |||
Variable cost of goods sold | $432,000 | |||
Gross Contribution Margin | $624,000 | |||
Less: Variable Selling and Administrative Expenses (24,000 * $1) | $24,000 | |||
Contribution Margin | $600,000 | |||
Less: Fixed expenses: | ||||
Fixed manufacturing overhead | $330,000 | |||
Fixed selling and administrative expenses | $240,000 | $570,000 | ||
Net operating income | $30,000 | |||
*Variable cost of goods manufactured = Units produced * Variable unit product cost | ||||
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