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 $ 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

Solution:

1.a.)

Unit product cost under absorption costing method:

Absorption costing = Direct Materials + Direct labor + Total Manufacturing Overhead Per Unit

Direct Materials	$6
Direct labor	$9
Variable manufacturing overhead	$3
Fixed manufacturing overhead per unit ($300,000 ÷ 25,000 units)	$12
Unit product cost under absorption costing	$30

1.b.)

The absorption costing income statement:

Sales ($50 × 20,000)	$1,000,000
Costs of goods sold ($30 × $20,000)	$600,000
Gross income	$400,000
Total selling and administrative expenses ($4 × 20,000 + $190,000)	$270,000
Net operating income	$130,000

2.a.) Unit product cost under variable costing:

Variable costing = Direct Materials + Direct labor + Variable Manufacturing Overhead

Direct Materials	$6
Direct labor	$9
Variable manufacturing overhead	$3
Unit product cost under variable costing	$18

2.b.)

Income Statement under Variable Costing:

Sales ($50 × 20,000 units)	$1,000,000
Variable expenses:
Variable cost of goods sold ($18 × 20,000 units)	$(360,000)
Variable selling and administrative expenses ($4 × 20,000)	$(80,000)
Total variable expenses	$(440,000)
Contribution margin	$560,000
Fixed selling and administrative expenses	$(190,000)
Fixed manufacturing overhead	$(300,000)
Net income under variable costing	$70,000