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 $14
Direct labor $5
Variable manufacturing overhead $1
Variable selling and administrative $1
Fixed costs per year:
Fixed manufacturing overhead $264,000
Fixed selling and administrative $ 174,000
During the year, the company produced 33,000 units and sold 15,000 units. The selling price of the company’s product is $52 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

1a. $28

1b. Income statement for the year Absorption Costing

Sales (15,000 units × $52) $780,000

Less Cost of Sales

Opening Stock $0

Add Cost of Goods Manufactured $924,000

Less Closing Inventory ($504,000) $420,000

Gross Profit $360,000

Less Expenses :

Selling and administrative Expenses :

Variable ($1 × 15,000 units) ($15,000)

Fixed ($ 174,000)

Net Income/ (Loss) $171,000

2a. $20

2b. Income statement for the year Variable Costing

Sales (15,000 units × $52) $780,000

Less Cost of Sales

Opening Stock $0

Add Cost of Goods Manufactured $660,000

Less Closing Inventory ($360,000) ($300,000)

Gross Profit $480,000

Less Expenses :

Selling and administrative Expenses :

Fixed manufacturing overhead ($264,000)

Variable ($1 × 15,000 units) ($15,000)

Fixed ($ 174,000)

Net Income/ (Loss) $27,000

Step-by-step explanation:

Absorption Costing :

Unit product cost = all manufacturing costs (fixed and variable)

= $14 + $5 + $1 + ($264,000 / 33,000)

= $28

Cost of Goods Manufactured = 33,000 units × $28

= $924,000

Closing Inventory = 18,000 units × $28

= $504,000

Variable Costing :

Unit product cost = variable manufacturing costs

= $14 + $5 + $1

= $20

Cost of Goods Manufactured = 33,000 units × $20

= $660,000

Closing Inventory = 18,000 units × $20

= $360,000