Question

CASE 6–29 Variable and Absorption Costing Unit Product Costs and Income Statements O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable cost per unit:
Manufacturing
Direct materials	$35
Direct labor	$22
Variable manufacturing overhead	$6
Fixed costs per year:
Fixed manufacturing overhead	$690,000
Fixed selling and administrative expenses	$150,000

Note: Direct materials are projected to increase 10% every year while cost of direct labor will increase by 5% each yearDuring its first year of operations, O’Brien produced 120,000 units and sold 90,000 units. During its second year of operations, it produced 80,000 units and sold 110,000 units. In its third year, O’Brien produced 85,000 units and sold 80,000 units. The selling price of the company’s product is $80 per unit.

1. Assume the company uses absorption costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):

2. a. Compute the unit product cost for Year 1, Year 2, and Year 3.

3. b. Prepare an income statement for Year 1, Year 2, and Year 3.

Answer 1

Solution (11) Y1003 seit maronia 2 labour 2 1.a Under Variable Costing only the loomaklo bonufacturing costs are included in produece costs. V nous f ono lecast pisect matonak Yearra 3 5 3224 6 Variable manufacturing overhead 6 variable costing unit product costs 163 635 Note: Direct in the ته در زلزله - the selling & adsrisistrative expenses are ret treated an Product Crots. ie they are not included costs that are inventoried. These expenses treated as period earts. 1. b) sales (A) Year 1 Year 2 Yeah? 4. +2,00.000 88.000 44000 90000 x 20) 6,0,0001) Variable expenses ( B us variable cok-of gooch2011 @ 63 56,#0000 69.30oco 594000 perumt Goocok 63) (10cco 639 ( ex 63 Contribution margin 15,36,000 18,70000 A-K) 360000 029 TL 690000 SOLO 5,2ecco. fixed expenses fixed manufacturing 640000 690000 Fixed selling & adrominitrate 150000 150ooo ! 150000 espere total Fixed Expenses (1 840000 840000 Net operating income Clerde $690000 10 70000 The Unit produit cost under absorption conting: - Year 2 Year 25 Your) 35 2.0 35 22 6. 1.85 1.765 64.825 64.765 Di Seltmate Dial piret labous vorable manufacturing overhod cixed manufacturing overhead 125 *$ 150000 20000 waris 41-25 perum ** $150000 -80,000 ure 80,000 umbs + 1-875 perunit 1. ums=4 1.765 per vry. 174 85.000 um = *** i Socoo

(FIFO) 2.6) absorption conting income statem are appears below: 2 years of Year 2 Years . 7900000 $ 5500000 $64,00 000 Coro Goods sold & 5282500 * 71, 17500 A 81200 14 17500 16,82500 1218800 Selline odrairitgabine 150000 Sales Gross margin (S0000 150000 er renes 600 1532800 15 39500 1065800 AC Nex operating in locoe & 1267500 & 2 A 90000 vrnits X & 64.25 perumit = 4 5782500 26 ** 110000 units 20000 write & huer pesurit + 90000 uroits x 64.25 per weit - 5190000 + 1929500 47117500 * * 80000 units. & 64.765 perwon't - S1,81,200