Question

Exercise 6-6 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2] 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 $ 14 Direct labor $ 5 Variable manufacturing overhead $ 1 Variable selling and administrative $ 1 Fixed costs per year: Fixed manufacturing overhead $ 264,000 Fixed selling and administrative $ 174,000 During the year, the company produced 33,000 units and sold 15,000 units. The selling price of the company’s product is $52 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	14
Direct labor	5
Variable manufacturing overhead	1
Fixed manufacturing overhead	8		=264000/33000
Unit product cost	28
b
Absorption Costing Income Statement
Sales	780000		=15000*52
Cost of goods sold	420000		=15000*28
Gross margin	360000
Selling and administrative expenses	189000		=174000+(15000*1)
Net operating income (loss)	171000
2a
Direct materials	14
Direct labor	5
Variable manufacturing overhead	1
Unit product cost	20
b
Variable Costing Income Statement
Sales		780000	=15000*52
Variable expenses:
Variable Cost of goods sold	300000		=15000*20
Variable Selling and administrative expenses	15000		=15000*1
		315000
Contribution margin		465000
Fixed expenses:
Fixed manufacturing overhead	264000
Fixed Selling and administrative expenses	174000
		438000
Net operating income (loss)		27000