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	$	10
Direct labor	$	4
Variable manufacturing overhead	$	2
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	374,000
Fixed selling and administrative	$	284,000

During the year, the company produced 34,000 units and sold 26,000 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.

Answer 1

Answer-1-a)- Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$10+$4+$2+$11 = $27 per unit

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

=$374000/34000 units =$11 per unit

b)-

Lynch Company
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	26000 units*$44 per unit		1144000
Less:- Cost of goods sold (b)
Opening inventory
Add:- Cost of goods manufactured		918000
Direct materials	34000 units*$10 per unit	340000
Direct labor	34000 units*$4 per unit	136000
Variable manufacturing overhead	34000 units*$2 per unit	68000
Fixed manufacturing overhead		374000
Cost of goods available for sale		918000
Less:- Closing inventory	8000 units*$27 per unit	216000	702000
Gross margin C= a-b			442000
Less:-Variable selling & administrative exp.	26000 units*$2 per unit		52000
Less:- Fixed costs
Selling & administrative exp.			284000
Net Income			106000

Answer-2-a)-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$10+$4+$2 = $16 per unit

2-b)-

Lynch Company
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	26000 units*$44 per unit		1144000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		544000
Direct materials	34000 units*$10 per unit	340000
Direct labor	34000 units*$4 per unit	136000
Variable manufacturing overhead	34000 units*$2 per unit	68000
Variable cost of goods available for sale		544000
Less:- Closing inventory	8000 units*$16 per unit	128000	416000
Gross contribution margin C= a-b			728000
Less:-Variable selling & administrative exp.	26000 units*$2 per unit		52000
Contribution margin			676000
Less:- Fixed costs
Manufacturing overhead			374000
Selling & administrative exp.			284000
Net Income			18000