Question

# Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s...

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 \$ 15 Direct labor \$ 5 Variable manufacturing overhead \$ 1 Variable selling and administrative \$ 1 Fixed costs per year: Fixed manufacturing overhead \$ 286,000 Fixed selling and administrative \$ 196,000

During the year, the company produced 26,000 units and sold 22,000 units. The selling price of the company’s product is \$46 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.

1.

a. Unit product cost under absorption costing = \$32 per unit produced

Solution :

 Absorption costing Direct material \$15 Direct labor \$5 Variable manufacturing overhead \$1 Fixed manufacturing overhead \$11 Product cost per unit \$32

Note 1: calculation of fixed manufacturing overhead per unit

= \$286000/26000 units

= \$11 per unit

b. income statement for the year:

 Amount Amount Sales \$1012000 (-) Cost of goods sold : Cost of opening inventory \$0 Cost of goods produced \$832000 Cost of closing inventory (\$128000) (\$704000) Gross profit \$308000 (-) Selling and administrative cost : Variable \$22000 Fixed \$196,000 (\$218000) Net profit \$90000

Note 2: calculations of sales

= \$46 × 22000

= \$1012000

Note 3: calculation of total cost of goods produced

= \$32 × 26000

= \$832000

Note 4: calculations of cost of closing inventory

= \$32 × (26000 - 22000)

= \$32 × 4000

= \$128000

Note 5: calculations of total variable selling and administrative cost

= \$1 × 22000

= \$22000

2.

a.

Unit product cost under absorption costing = \$21 per unit produced

Solution :

 Absorption costing Direct material \$15 Direct labor \$5 Variable manufacturing overhead \$1 Fixed manufacturing overhead - Product cost per unit \$21

b. income statement for the year

 Sales \$1012000 Variable expenses : Manufacturing \$462000 Selling and administrative \$22000 (\$484000) Contribution margin \$528000 (-) Fixed expenses : Manufacturing \$286,000 Selling and administrative \$196,000 (\$482000) Net profit \$46000

Note 6 : calculations of total variable manufacturing cost

= \$21×22000

= \$462000

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