Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:
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 | $ | 11 |
| Direct labor | $ | 5 |
| Variable manufacturing overhead | $ | 2 |
| Variable selling and administrative | $ | 2 |
| Fixed costs per year: | ||
| Fixed manufacturing overhead | $ | 350,000 |
| Fixed selling and administrative | $ | 260,000 |
During the year, the company produced 35,000 units and sold 25,000 units. The selling price of the company’s product is $46 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.
| a. | Unit product cost: | ||
| Direct Material | $ 11 | ||
| Direct Labor | $ 5 | ||
| Variable Manufacturing overhead | $ 2 | ||
| Total Variable Cost | $ 18 | ||
| Fixed Manufacturing overhead ($350000/35000) | $ 10 | ||
| Unit product cost | $ 28 | ||
| b. | Absorption Costing Income Statement | ||
| Sales(25000 X $46) | $ 11,50,000 | ||
| Less: | Cost of Goods Sold | ||
| Beginning Inventory | 0 | ||
| Add: | Cost of Goods manufactured (35000 X $28) | $ 9,80,000 | |
| Goods available for sale | $ 9,80,000 | ||
| Less: | Ending Inventory (10000 X $28) | $ 2,80,000 | $ 7,00,000 |
| Gross Margin | $ 4,50,000 | ||
| Less: | Selling and Administrative expenses [(25000 X $2) + $260000] | $ 3,10,000 | |
| Net Operating Income | $ 1,40,000 | ||
| 2 | Under Variable Costing | ||
| a. | Unit product cost: | ||
| Direct Material | $ 11 | ||
| Direct Labor | $ 5 | ||
| Variable Manufacturing overhead | $ 2 | ||
| Unit product cost | $ 18 | ||
| b. | Variable Costing Income Statement | ||
| Sales(25000 X $46) | $ 11,50,000 | ||
| Less: | Variable expenses: | ||
| Variable Cost of goods sold: | |||
| Beginning Inventory | 0 | ||
| Add: | Variable Manufacturing Cost(35000 X $18) | $ 6,30,000 | |
| Goods available for sale | $ 6,30,000 | ||
| Less: | Ending Inventory (10000 X $18) | $ 1,80,000 | |
| Variable Cost of goods sold | $ 4,50,000 | ||
| Add: | Variable selling expenses (25000 X $2) | $ 50,000 | $ 5,00,000 |
| Contribution margin | $ 6,50,000 | ||
| Less: | Fixed Expenses: | ||
| Fixed Manufacturing overhead | $ 3,50,000 | ||
| Fixed Selling and Administrative expenses | $ 2,60,000 | $ 6,10,000 | |
| Net operating Income | $ 40,000 | ||
Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s...