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 Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative wa $ 300,000 $ 190,000 During the year, the company produced 25,000 units and sold 20,000 units. The selling price of the company's product is $50 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

1-A Assume Company Using Absorption Costing Calculation of Unit cost Under Absorption Costing Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head (300000/25000) Unit Product Cost Absorption Costing Unit Product Cost 30 1-B Income Statement Under Absorption Costing Sales (20000*50) Cost of Goods Sold (20000*30) Gross Margin Total Selling and Administrative Overheads (Fixed +Variable ),(190000+(20000*4)) Net Operating Income 1000000 600000 400000 270000 130000

2-A Assuming the Firm Using the Variable Cositng Variable Costing Calculation of Unit cost Under Variable Costing Direct Material Direct Labour Variable Manufacturing Overhead Unit Product Cost Variable Costing Unit Product Cost 1000000 360000 80000 2-B Variable Costing income Statement Sales (20000*50) LESS: Variable Expense Variable Cost of Goods Sold (20000*18) Variable Selling and Administrative Expense(200004) Total Varible Expenses Total Contribution Margin Less:Fixed Expenses Fixed manufacturing Overheads Fixed Selling and Administrative Expenses Total fixed Expenses Net operating income (loss) 4400001 560000 300000 1900001 4900001 70000