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	$	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.

Answer 1

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

Fixed manufacturing overhead per unit = Total overhead/units produced.

= $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