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	$	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.

Answer 1

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