Question

Exercise 6-6 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, L06-2] Lynch Company manufactures and sells a single product. The following costs were incurred during the company's first year of operations: A A 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 wa A A $ 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

1.

a.

	Absorption Costing
Direct Material	$                                    6
Direct Labor	$                                    9
Variable Manufacturing Overhead	$                                    3
Fixed Manufacturing Overhead ($300,000/25,000)	$                                  12
Unit Product Cost	$                                  30

b.

Lynch Company
Absorption costing income statement
Sales (20,000*$50)	$ 1,000,000
Less: Cost of goods sold (20,000*$30)	$     600,000
Gross profit	$     400,000
Selling and administrative expenses ($190,000+(20,000*$4)	$     270,000
Net income	$     130,000

2a.

	Variable Costing
Direct Material	$                            6
Direct Labor	$                            9
Variable Manufacturing Overhead	$                            3
Unit Product Cost	$                         18

b.

Lynch Company
Variable costing income statement
Sales (20,000*$50)		$ 1,000,000
Variable expenses
Direct material (20,000*$6)	$ 120,000
Direct labor (20,000*$9)	$ 180,000
Variable manufacturing overhead (20,000*$3)	$    60,000
Variable selling and administrative expenses (20,000*$4)	$    80,000
Total variable expenses		$     440,000
Contribution margin		$     560,000
Fixed expenses
Fixed manufacturing expense	$ 300,000
Fixed selling and administrative expenses	$ 190,000
Total fixed expenses		$     490,000
Net income		$        70,000

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