Lyons Company manufactures and sells one product. The following information pertains to the company’s first year of operations:

Lyons Company manufactures and sells one product. The following information pertains to the company’s first year of operations:

Variable cost per unit:
Direct materials	$	18.50
Fixed costs per year:
Direct labor	$	1,232,000
Fixed manufacturing overhead	$	505,000
Fixed selling and administrative expenses	$	152,500

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Lyons produced 77,000 units and sold 67,600 units. The selling price of the company’s product is $49 per unit.

Required:

1. Assume the company uses super-variable costing:

a. Compute the unit product cost for the year.

b. Prepare an income statement for the year.

 

2. Assume the company uses a variable costing system that assigns $16.00 of direct labor cost to each unit produced:

a. Compute the unit product cost for the year.

b. Prepare an income statement for the year.

 

3. Reconcile the difference between the super-variable costing and variable costing net operating incomes.

 

Explanation

1.

a.

The unit product cost under super-variable costing would include direct materials of $18.50.

1.

b.

Sales (67,600 units × $49 per unit) = $3,312,400

Variable cost of goods sold (67,600 units × $18.50 per unit) = $1,250,600

2.

a.

The unit product cost under variable costing would be:

Direct materials	$	18.50
Direct labor ($1,232,000 ÷ 77,000 units)		16.00
Variable costing unit product cost	$	34.50

2.

b.

Sales (67,600 units × $49 per unit) = $3,312,400

Variable cost of goods sold (67,600 units × $34.50 per unit) = $2,332,200

3.

The difference between the super-variable costing and variable costing net operating incomes is explained as follows:

Units in ending inventory = Units in beginning inventory + Units produced - Units sold = 0 units + 77,000 units - 67,600 units = 9,400 units

Direct labor cost deferred in (released from) inventory = Direct labor cost ending inventory - Direct labor cost in beginning inventory = (9,400 units × $16.00 per unit) - $0 = $150,400