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 $14
Direct labor $5
Variable manufacturing overhead $1
Variable selling and administrative $1
Fixed costs per year:
Fixed manufacturing overhead $264,000
Fixed selling and administrative $ 174,000
During the year, the company produced 33,000 units and sold 15,000 units. The selling price of the company’s product is $52 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.

1a. $28

1b. Income statement for the year Absorption Costing

Sales (15,000 units × $52)                                             $780,000

Less Cost of Sales

Opening Stock                                          $0

Add Cost of Goods Manufactured     $924,000

Less Closing Inventory                       ($504,000)       $420,000

Gross Profit                                                                    $360,000

Less Expenses :

Selling and administrative Expenses :

Variable ($1 × 15,000 units)                                           ($15,000)

Fixed                                                                            ($ 174,000)

Net Income/ (Loss)                                                        $171,000

2a. $20

2b. Income statement for the year Variable Costing

Sales (15,000 units × $52)                                             $780,000

Less Cost of Sales

Opening Stock                                          $0

Add Cost of Goods Manufactured     $660,000

Less Closing Inventory                       ($360,000)       ($300,000)

Gross Profit                                                                     $480,000

Less Expenses :

Selling and administrative Expenses :

Fixed manufacturing overhead                                   ($264,000)

Variable ($1 × 15,000 units)                                            ($15,000)

Fixed                                                                             ($ 174,000)

Net Income/ (Loss)                                                          $27,000

Explanation:

Absorption Costing :

Unit product cost = all manufacturing costs (fixed and variable)

                             = $14 + $5 + $1 + ($264,000 / 33,000)

                             = $28

Cost of Goods Manufactured = 33,000 units × $28

                                                 = $924,000

Closing Inventory = 18,000 units × $28

                             = $504,000

Variable Costing :

Unit product cost = variable manufacturing costs

                             = $14 + $5 + $1

                             = $20

Cost of Goods Manufactured = 33,000 units × $20

                                                 = $660,000

Closing Inventory = 18,000 units × $20

                             = $360,000

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