Question

Lynch Company manufactures and sells a single product. The following costs were incurred during the company's first year of operations: Variable conta per uniti Manufacturing Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Pixed costs per year. Fixed manufacturing overhead Fixed selling and administrative $420,000 $330,000 During the year, the company produced 30,000 units and sold 25,000 units. The selling price of the company's product is $54 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. Complete this question by entering your answers in the tabs below. Reg 1A Reg 1B Reg 2A Reg 2B Compute the unit product cost. Assume that the company uses absorption costing. Unit product cost

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	$11.00
	Direct labor	$8.00
	Variable Overhead per unit	$1.00
	Fixed overhead per unit   ($420,000 / 30,000)	$14.00
	Product Cost per unit	$34.00
	*Fixed overhead per unit = Fixed manufacturing overhead / Units produced
Ans. 1 b	Lynch Company
	Absorption Costing Income Statement
	PARTICULARS		Amount
	Sales   (25,000 * $54)		$1,350,000
	Less: Cost of goods sold
	Opening inventory	$0
	Add: Cost of goods manufactured (30,000*$34)	$1,020,000
	Cost of goods available for sale	$1,020,000
	Less: Ending inventory [(30,000 - 25,000) * $34]	-$170,000
	Cost of goods sold (total)		$850,000
	Gross margin		$500,000
	Selling & Administrative expenses:
	Fixed	$330,000
	Variable     (25,000 * $1)	$25,000
	Total Selling and administrative expenses		$355,000
	Net operating income		$145,000
	*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	$11.00
	Direct labor	$8.00
	Variable Overhead per unit	$1.00
	Total production cost per unit	$20.00
Ans. 2 b	COOL SKY
	Variable Costing Income Statement
	PARTICULARS		Amount
	Sales   (25,000 * $54)		$1,350,000
	Less: Variable cost of goods sold:
	Opening inventory	$0
	Add: Variable cost of goods manufactured (30,000 * $20)	$600,000
	Variable cost of goods available for sale	$600,000
	Less: Ending inventory [(30,000 - 25,000) * $20]	-$100,000
	Variable cost of goods sold		$500,000
	Gross Contribution Margin		$850,000
	Less: Variable Selling and Administrative Expenses (25,000 * $1)		$25,000
	Contribution Margin		$825,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$420,000
	Fixed selling and administrative expenses	$330,000	$750,000
	Net operating income		$75,000
	*Variable cost of goods manufactured = Units produced * Variable unit product cost