Question

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 material = $ 11 Direct labor = $ 3 Variable manufacturing overhead = $ 1 Variable selling and administrative = $ 1 Fixed costs per year: Fixed manufacturing overhead = $ 330,000 Fixed selling and administrative = $ 240,000 During the year, the company produced 30,000 units and sold 23,000 units. The selling price of the company’s product is $43 per unit. 1) Assume that the company uses absorption costing:
a. Compute the unit product cost. 2) Assume that the company uses variable costing:
a. Compute the unit product cost.

Answer 1

Answer:

1.a. cost of unit product using absorption costing is $26

2.a. Cost of unit product using variable costing is $15

Explanation:

When using absorption costing both variable and fixed cost are included. For this case you have to exclude selling and administrative cost since they are not part of the cost of the product

In absorption costing you must include the fixed cost

1.a

                      Units  Cost Total

Direct Material          30,000.00   11.00   (330,000.00)

Direct labor                   30,000.00   3.00   (90,000.00)

Variable manufacturing overhead  30,000.00   1.00   (30,000.00)

Fixed manufacturing overhead   30,000.00   11.00   (330,000.00)

In variable cost you must exclude the fixed cost

2.a

                      Units  Cost Total

Direct Material          30,000.00   11.00   (330,000.00)

Direct labor                   30,000.00   3.00   (90,000.00)

Variable manufacturing overhead  30,000.00   1.00   (30,000.00)