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

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	$	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	$	141,000

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.

Explanation

1.
a.

The unit product cost under absorption costing would be:

Direct materials	$	10
Direct labor		4
Variable manufacturing overhead		1
Total variable costs		15
Fixed manufacturing overhead ($231,000 ÷ 21,000 units)		11
Absorption costing unit product cost	$	26

b.

Sales (17,000 units × $40 per unit) = $680,000

Cost of goods sold (17,000 units × $26 per unit) = $442,000

Selling and administrative expenses [(17,000 units × $1 per unit) + $141,000] = $158,000

2.
a.

The unit product cost under variable costing would be:

Direct materials	$	10
Direct labor		4
Variable manufacturing overhead		1
Variable costing unit product cost	$	15

b.

Sales (17,000 units × $40 per unit) = $680,000

Variable cost of goods sold (17,000 units × $15 per unit) = $255,000

Variable selling expense (17,000 units × $1 per unit) = $17,000

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