Question

Ogilvy Company manufactures and sells one product. The following information pertains to each of the company's first three years of operations: $16 Variable cost per unit: Direct materials ... Fixed costs per year: Direct labor ........ Fixed manufacturing overhead ......... Fixed selling and administrative expenses .......... $540,000 $822,000 $370,000 The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 60.000 units and sold 55,000 units. In its third year, Ogilvy produced 60,000 units and sold 65,000 units. The selling price of the company's product is $45 per unit. Required: 1. Assume the company uses super-variable costing: a. Compute the unit product cost for Year 1 Year 2, and Year 3. b. Prepare an income statement for Year 1, Year 2, and Year 3. 2. Assume the company uses a variable costing system that assigns $9 of direct labor cost to each unit produced: a. Compute the unit product cost for Year 1, Year 2, and Year 3. b. Prepare an income statement for Year 1, Year 2, and Year 3. 3. Prepare a reconciliation that explains the difference between the super-variable costing and variable costing net operating incomes in Years 1, 2, and 3.

Answer 1

		Unit product
Req 1A)		cost
	Year 1	16
	year 2	16
	year 3	16
				60,000	55,000	65,000
Req 1B)	Super Variable costing income statement
				Year 1	Year 2	Year 3
	Sales			2700000	2530000	2990000
	Variable cost of goods sold			960000	880000	1040000
	Contribution margin			1740000	1650000	1950000
	Fixed expenses:
	Direct Labor			540,000	540,000	540,000
	fixed manufacturing overhead			822,000	822,000	822,000
	Fixed selling and Administrative			370,000	370,000	370,000
	Total fixed expenses			1,732,000	1,732,000	1,732,000
	Net operating income(loss)			8,000	-82,000	218,000
		Unit product
Req 2A		cost
	Year 1	25
	year 2	25
	year 3	25
Req 2B)				60,000	55,000	65,000
	Variable costing income statement
				Year 1	Year 2	Year 3
	Sales			2700000	2530000	2990000
	Variable cost of goods sold			1500000	1375000	1625000
	Contribution margin			1200000	1155000	1365000
	Fixed expenses:
	fixed manufacturing overhead			822,000	822,000	822,000
	Fixed selling and Administrative			370,000	370,000	370,000
	Total fixed expenses			1,192,000	1,192,000	1,192,000
	Net operating income(loss)			8,000	-37,000	173,000
Req 3						Year 1	Year 2	Year 3
	Super- variable Costing net operating income (loss)					8,000	-82,000	218,000
	Direct labor cost deferred in inventory under variable costing					0	45000
	Direct labor cost releasedin beginning inventory under variable costing							-45,000
	Variable Costing net operating income (loss)					8,000	-37,000	173,000