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	$	12
Direct labor	$	3
Variable manufacturing overhead	$	1
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	324,000
Fixed selling and administrative	$	234,000

During the year, the company produced 27,000 units and sold 23,000 units. The selling price of the company’s product is $42 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) Unit product cost

Direct material	12
Direct labor	3
Variable manufacturing overhead	1
Fixed manufacturing overhead (324000/27000)	12
Unit product cost	28

1b) Income statement

Sales (23000*42)	966000
Cost of goods sold (23000*28)	644000
Gross profit	322000
Selling and administrative expense (23000*1+234000)	257000
Net income	65000

2a) Unit product cost

Direct material	12
Direct labor	3
Variable manufacturing overhead	1
Unit product cost	16

2b) Income statement

Sales (23000*42)		966000
variable Cost of goods sold (23000*16)		368000
Manufacturing margin		598000
Variable selling and administrative expense		23000
Contribution margin		575000
Fixed cost
Fixed manufacturing overhead	324000
Fixed Selling and administrative expense	234000
Total Fixed cost		558000
Net income		17000