Lincoln Company, which has only one product, has provided the following data con
ID: 2422464 • Letter: L
Question
Lincoln Company, which has only one product, has provided the following data concerning its most recent month of operations.
Selling price
$125
Units in beginning inventory
600
Units produced
3,000
Units sold
3,500
Units in ending inventory
100
Variable costs per unit:
Direct materials
$27
Direct labor
$18
Variable manufacturing overhead
$10
Variable selling and admin
$12
Fixed costs:
Fixed manufacturing overhead
$75,000
Fixed selling and admin
$30,000
Required:
What is the unit product cost for the month under variable costing?
What is the unit product cost for the month under absorption costing?
Prepare an income statement for the month using the variable costing method.
Prepare an income statement for the month using the absorption costing method.
Please show work for credit
Selling price
$125
Units in beginning inventory
600
Units produced
3,000
Units sold
3,500
Units in ending inventory
100
Variable costs per unit:
Direct materials
$27
Direct labor
$18
Variable manufacturing overhead
$10
Variable selling and admin
$12
Fixed costs:
Fixed manufacturing overhead
$75,000
Fixed selling and admin
$30,000
Explanation / Answer
Computation of Unit Product Cost
Absorption Costing Variable Costing
Direct Meterial $ 27 $ 27
Direct Labour $ 18 $ 18
Variable Manufactoring Overhead $ 10 $ 10
Fixed Manufactoring Overhead (75000/3000) $ 25
Unit Product Cost $ 80 $ 55
Notice that the fixed manufacturing overhead cost has not been included while computing the cost of one unit under variable costing system.
Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost.
Income Statement
Variable Costing
Sales (125*3500) $ 4,37,500
Variable Expenses:
Variable cost of goods sold
Direct Meterial (27*3500) $ 94,500
Direct Labour (18*3500) $ 63,000
Variable Manufactoring Overhead (10*3500) $ 35,000
Variable Selling and admin exp. (12*3500) $ 42,000
Total Variable Expenses $ 2,34,500
Contribution Margin $ 2,03,000
Fixed Expenses:
Fixed manufacturing overhead $ 75,000
Fixed selling and admin $ 30,000
Total Fixed Expenses $ 1,05,000
Net Operating Income $ 98,000
Absorption Costing
Sales $ 4,37,500
Cost of Goods Sold variable(3500*(27+18+10) $ 1,92,500
Cost of Goods Sold Fixed (75000/3000)*3500 $ 87,500
Gross Margin $ 1,57,500
Selling and Administrative Exp. ((3500*12)+30000) $ 72,000
Net Operating Income $ 85,500
Computation of Unit Product Cost
Absorption Costing Variable Costing
Direct Meterial $ 27 $ 27
Direct Labour $ 18 $ 18
Variable Manufactoring Overhead $ 10 $ 10
Fixed Manufactoring Overhead (75000/3000) $ 25
Unit Product Cost $ 80 $ 55
Notice that the fixed manufacturing overhead cost has not been included while computing the cost of one unit under variable costing system.
Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost.
Income Statement
Variable Costing
Sales (125*3500) $ 4,37,500
Variable Expenses:
Variable cost of goods sold
Direct Meterial (27*3500) $ 94,500
Direct Labour (18*3500) $ 63,000
Variable Manufactoring Overhead (10*3500) $ 35,000
Variable Selling and admin exp. (12*3500) $ 42,000
Total Variable Expenses $ 2,34,500
Contribution Margin $ 2,03,000
Fixed Expenses:
Fixed manufacturing overhead $ 75,000
Fixed selling and admin $ 30,000
Total Fixed Expenses $ 1,05,000
Net Operating Income $ 98,000
Absorption Costing
Sales $ 4,37,500
Cost of Goods Sold variable(3500*(27+18+10) $ 1,92,500
Cost of Goods Sold Fixed (75000/3000)*3500 $ 87,500
Gross Margin $ 1,57,500
Selling and Administrative Exp. ((3500*12)+30000) $ 72,000
Net Operating Income $ 85,500
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