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	$	11
Direct labor	$	8
Variable manufacturing overhead	$	1
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	420,000
Fixed selling and administrative	$	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.

Answer 1

Part-1.a The Absorption Costing Unit Product Cost
	$
Direct Materiall	$11.00
Direct Labour	$8.00
Variable Manufacturign Overhead	$1.00
Variable Manufacturing cost (a)	$20.00
Fixed Manufacturing overhead cost (420000/30000)	$14.00
Unit Product cost	$34.00
Part-b The Absorption Costing Income Statement
	$
No. of Unit Sold	25000
Sales @$54	$1,350,000
Less: Cost of Goods sold @$34	$850,000
Gross Margin	$500,000
Less: Other Expense
Variable Selling & Admin cost @$1	$25,000
Fixed Selling & Admin Cost	$330,000
Net operating income	$145,000

Part-2.a Compuation of Unit Product cost- Variable Costing
	$
Direct Material	$11.00
Direct labour	$8.00
Variable Manufacturing overheads	$1.00
Variable Product cost	$20.00
Part-b: The Variable Costing Income Statement
	$
No. of Unit Sold	25000
Sales @$54	$1,350,000
Less: Variable cost
variable Manaufacturing cost @ $20	$500,000.00
Variable Selling & Admin cost @1	$25,000.00
Contribution margin	$825,000.00
Fixed expense:
Fixed Manufacturing cost	$420,000.00
Fixed Selling & Admin Cost	$330,000.00
Net operating Income	$75,000.00

Part-d: Reconciliation Statement of Income
	$
Income under variable costing	$75,000.00
Fixed OH in Inventory (5000X 14)	$70,000.00
Income under Absorption Costing	$145,000.00

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