Exercise 7-6 Variable and Absorption Costing Unit Product Costs and Income State

Question

Exercise 7-6 Variable and Absorption Costing Unit Product Costs and Income Statements [LO7-1, LO7-2 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 12 Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per year Fixed manufacturing overhead Fixed selling and administrative $276,000 $186,000 During the year, the company produced 23,000 units and sold 19,000 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

Explanation / Answer

A) Calculate fixed manufacturing overhead per unit fixed manufacturing overhead = total manufacturing overhead/no of unit produced fixed manufacturing overhead = 276000/23000 = 12 Calculation of the unit product cost by using absorption costing particulars per unitt cost Direct material 12 direct labour 6 variable manufacturing overhead 3 fixed manufacturing overhead 12 unit product cost by using absorption costing 33 b) calculation of sale sale = (unit sold* selling price per unit) sale = (19000*50) = 950000 calculation of cost of goods sold cost of goods sold= (unit sold*unit product cost) cost of goods sold = (19000*33) = 627000 calculation of selling & administrative expenses selling & adm cost = (unit sold*cost per unit) selling & adm cost = (19000*3) =57000 income statement for the year Particulars Amount sales 950000 cost of goods sold 627000 contribution margin 323000 less: selling & adm exp(57000+186000) 243000 net operating income 80000 2)(a) Calculate the unit product cost by using variable costing particulars per unit cost Direct material 12 direct labour 6 variable manufacturing overhead 3 unit product cost by using variable costing 21 b) calculation of variable cost of goods sold cost of goods sold = (unit sold*unit product cost) cost of goods sold = (19000*21) = 399000 calculation of variable selling and administrative expenses variable selling & administrative cost= (unit sold* variable cost per unit) variable selling & administrative cost= (19000*3) = 57000 preparation of income statement particulars amount Sales 950000 less: variable cost cost of goods sold 399000 selling & adm cost 57000 total variable expenses 456000 contribution margin 494000 less: fixed expenses manufaturing expenses 276000 selling & adm cost 186000 total fixed expenses 462000 net operating income 32000

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