Lynch Company manufactures and sells a single product. The following costs were
ID: 2393310 • Letter: L
Question
Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:
During the year, the company produced 21,000 units and sold 17,000 units. The selling price of the company’s product is $40 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.
Variable costs per unit: Manufacturing: Direct materials $ 10 Direct labor $ 4 Variable manufacturing overhead $ 1 Variable selling and administrative $ 1 Fixed costs per year: Fixed manufacturing overhead $ 231,000 Fixed selling and administrative $ 141,000Explanation / Answer
Construct The Absorption Costing Unit Product Cost Direct Material 10 Direct labour 4 Variable Manufacturing overheads 1 Fixed Manufacturing overheads 11.00 (231000/21000) Absorption costing unit prroduct cost 26.00 Construct the Absorption Costing Income Statement Under FIFO Year 1 Sales $680,000 Cost of Goods sold 442000 Gross Margin $238,000 Selling and distribution expense 158,000 Net operating income 80,000 Compute the Variable costing Unit Product cost Direct Material 10 Direct labour 4 Variable Manufacturing overheads 1 Variable costing unit prroduct cost 15 Construct The Variable Costing Income Statement YEAR 1 Sales 680,000 Less: Variable cost variable cost of goods sold 255,000 Variable selling expense 17,000 272,000 Contribution margin 408,000 Fixed expense: Fixed Manufacturing overheads 231,000 Fixed selling expense 141,000 Net operating Income 36,000
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