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 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6

         Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9

         Variable manufacturing overhead . . . . . . . . .. . . $ 3

   Variable selling and administrative . . . .       . . . . .. . $ 4

Fixed costs per year:

   Fixed manufacturing overhead . . . . . . . . . . . . . . . . . $ 300,000

   Fixed selling and administrative . . . . . . . . . . . . . . . . $ 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 and compute the unit product cost.

2.       Assume that the company uses variable cost and compute the unit product cost.

Answer 1

compute the unit product cost as per absorption costing.

     # the unit product cost under absorption costing includes direct material , direct labor ,variable manufacturing overheads ,and fixed manufacturing overhead ,fixed manufacturing over head unit cost is calculated by dividing the total fixed manufacturing overhead by the number of unit produced .

= DM + DL + Variable manufacturing overhead +Fixed manufacturing overhead

= $6 + $9 + $3 + ( $300000 /25000 )

= $ 18 + $ 12

= $ 30

compute the unit product cost as per variable cost.

# the unit product cost under variable costing includes direct material ,direct labor and variable manufacturing overhead costs :

= DM + DL + Variable manufacturing over head

= $ 6 + $ 9 + $ 3

= $ 18