Question

requiremnets 1a. 1b. 2a. 2b.

Exercise 7-6 Variable and Absorption Costing Unit Product Costs and Income Statements (L07-1, LO7 Lynch Company manufactures and sells a single product. The following costs were incurred during the company's first year of operations: Variable costa per uniti Manufacturing: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costo per year. Fixed manufacturing overhead Fixed selling and administrative $276,000 $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 u 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. Complete this question by entering your answers in the tabs below. Reg 1A Reg 1B Req 2A Req 28 Compute the unit product cost. Assume that the company uses absorption costing. Unit product cost Reg 18 >

Answer 1

1. a - Unit product cost under absorption costing

Unit product cost =	Total per unit variable cost + Per unit fixed manufacturing overhead
=	(Direct material per unit + Direct labor per unit + Variable manufacturing overhead per unit) + (Fixed manufacturing overhead / Number of unit produced)
=	(12 + 6 + 3) + (276,000 / 23,000)
=	$ 21 + $12
=	$ 33 per unit

1. b - Income statement under absorption costing

Lynch company
Income Statement (Absorption Costing)
Year 1
Sales		$ 950,000
(19,000 units * $ 50/unit)
- Cost of Goods Sold		$ 627,000
($ 33 per unit as computed above * 19,000 units)
Gross Profit		$ 323,000
Operating Expenses
Selling and administrative expenses:
Variable selling and administrative (19,000 units * $3/unit)	$    57,000
Fixed selling and administrative expenses	$ 186,000
Total Expenses		$ 243,000
Net Income (Gross Profit - Total Expenses)		$    80,000

2. a - Unit product cost under variable costing

Unit product cost =	Total per unit variable cost
=	Direct material per unit + Direct labor per unit + Variable manufacturing overhead per unit
=	$12 + $6 + $3
=	$ 21 per unit

2. b - Income statement under variable costing

Lynch company
Income Statement (Absorption Costing)
Year 1
Sales (19,000 units * $ 50/unit)		$ 950,000
Variable Costs
Cost of Goods Sold (19,000 units * $ 21/unit as computed above)	$ 399,000
Variable selling and administrative exps (19,000 units * $3/unit)	$    57,000
Total Variable Costs		$ 456,000
Contribution Margin		$ 494,000
Fixed Costs
Fixed manufacturing overhead	$ 276,000
Fixed selling and administrative expenses	$ 186,000
Total Expenses		$ 462,000
Net Income (Gross Profit - Total Expenses)		$    32,000

The net income under variable costing is $48,000 less as in this method as we're deducting the entire $276,000 of the fixed manufacturing overhead from the income. In the absorption costing method, only the amount attributed to the number of goods sold i.e. cost for 19,000 units is deducted from income with the remaining (4000 units * $12 per unit) being as part of inventory of finished goods produced.