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

Question

Exercise 6-6 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2]

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 34,000 units and sold 26,000 units. The selling price of the company’s product is $44 per unit.

    

    

                   

Prepare an income statement for the year.

               

   

               

Prepare an income statement for the year.

            

Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Explanation / Answer

1. Calculation of unit product cost:[1a.&2a]

* $374000/34000=$ 11

Notice that the fixed manufacturing overhead cost has not been included while computing the cost of product cost under Variable costing method.

NOTE: Selling and administrative expenses (both fixed and variable) are not relevant for the computation of unit product cost.

2.Calculation of Income Statement:[1b. &2b.]

NOTE:

Cost of goods manufactured*

For Absorption costing cost per unit is $27

For Variable costing cost per unit is $16 and No. of units are Manufactured units minus closing stock units (34000-8000=26000Units multiplied by their costs.

Particulars Absorption costing Variable costing Direct Material $ 10 $ 10 Direct labor $ 4 $ 4 Variable manufacturing overhead $ 2 $ 2 Fixed Manufacturing overhead $ 11* - UNIT Product Cost $ 27 $ 16

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