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 httी $308,000 $218,000 During the year, the company produced 28,000 units and sold 24,000 units. The selling price of the company's product is $41 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	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
	Direct labor	$4
	Variable Overhead per unit	$1
	Fixed overhead per unit   ($308,000 / 28,000)	$11
	Unit product cost	$27
	*Fixed overhead per unit = Fixed overhead / Units produced
Ans. 1 b	Lynch Company
	Absorption Costing Income Statement
	PARTICULARS		Amount
	Sales   (24,000 * $41)		$984,000
	Less: Cost of goods sold
	Opening inventory	$0
	Add: Cost of goods manufactured (28,000*$27)	$756,000
	Cost of goods available for sale	$756,000
	Less: Ending inventory [(28,000 - 24,000) * $27]	-$108,000
	Cost of goods sold (total)		$648,000
	Gross margin		$336,000
	Selling & Administrative expenses:
	Fixed	$218,000
	Variable    (24,000 * $1)	$24,000
	Total Selling and administrative expenses		$242,000
	Net Income		$94,000
	*Variable selling & administrative expenses   =   Units sold * Variable selling and administrative expenses per unit
	*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
	Direct labor	$4
	Variable Overhead per unit	$1
	Unit product cost	$16
Ans. 2 b	Lynch Company
	Variable Costing Income Statement
	Particulars		Amount
	Sales   (24,000 * $41)		$984,000
	Less: Variable cost of goods sold:
	Opening inventory	$0
	Add: Variable cost of goods manufactured (28,000 * $16)	$448,000
	Variable cost of goods available for sale	$448,000
	Less: Ending inventory [(28,000 - 24,000) * $16]	-$64,000
	Variable cost of goods sold		$384,000
	Gross Contribution Margin		$600,000
	Less: Variable Selling and Administrative Expenses ($1 * 24,000)		$24,000
	Contribution Margin		$576,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$308,000
	Fixed selling and administrative expenses	$218,000	$526,000
	Net operating income		$50,000
	*Variable cost of goods manufactured = Units produced * Variable unit product cost