Question

Required information

[The following information applies to the questions displayed below.]

O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	28
Direct labor	$	17
Variable manufacturing overhead	$	4
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	590,000
Fixed selling and administrative expenses	$	120,000

During its first year of operations, O’Brien produced 100,000 units and sold 72,000 units. During its second year of operations, it produced 83,000 units and sold 106,000 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 $73 per unit.

2. Assume the company uses variable costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):

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. 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):

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.

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

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.

Answer 1

2. Company uses variable costing and LIFO inventory: a) Compute Variable costing unit product cost as follows: Year 2 Year 1 Year 3 Direct material Direct Labor Variable manufacturing overhead Variable costing unit product cost $28 $28 $28 $17 $17 $17 $4 $4 $4 $49 $49 $49 b) Prepare Income statement as follows:

O'Brien Variable Costing Income Statement Year 1 Year 2 Year 3 Sales (A) $5,256,000 $7,738,000 (72,000 units x $73) (106,000 units x$73) (80,000 units x$73) $5,840,000 Variable Cost: Variable COGS $3,528,000 $5,194,000 $3,920,000 (72,000 units x $49) (106,000 units x$49) (80,000 units x$49) Variable Selling and administrative $216,000 $318,000 (106,000 units x$3) (80,000 units x$3) $240,000 (72,000 units x $3) Total Variable expense (B $3,744,000 $5,512,000 $4,160,000 Contribution margin (C = A-B) Fixed Expenses: $1,512,000 $2,226,000 $1,680,000 %3! Fixed manufacturing overhead Fixed selling and administrative Total Fixed expense (D) $590,000 $120,000 $590,000 $590,000 $120,000 $120,000 $710,000 $710,000 $710,000 Net operating Income (C-D) S9 70.000 S1,516,000 S802,000 3. Company uses Absorption costing and FIFO inventory:

a) Compute unit product cost under Absorption costing as follows: Year 1 Year 2 Year 3 Direct material Direct Labor Variable manufacturing overhead Fixed manufacturing overhead (W.N 1) Absorption costing unit product cost $28 $17 $28 $28 $17 $17 $4 $4 $4 $6.94 $5.90 $7.11 $56.11 $55.94 $54.90 W.N 1 Year 1 Year 2 Year 3 Fixed manufacturing overhead $590,000 $590,000 $590,000 Units produced 85,000 100,000 83,000 $7.11 Per unit cost $6.94 $5.90 b) Prepare Income statement as follows:

O'Brien Absorption Costing Income Statement Year 2 Year 1 Year 3 Sales (A) $5,256,000 $7,738,000 $5,840,000 (72,000 units x $73) (106,000 units x$73) (80,000 units x$73) COGS (W.N 2) (B) Gross margin (C = A-B) Selling and administrative expenses (D) $3,952,800 $1,303,200 $5,913,780 $1,824,220 $4,476,050 $1,363,950 $336,000 $438,000 $360,000 ($216000+$120000) ($318000+$120000) $240000+$120000) Net operating Income (C-D) $1.386,220 $967,200 $1.003.950 W.N 2

FIFO method Year 1 Produced Sold Cost per unit COGS Total Units 100,000 72,000 $54.90 $3,952,800 $3,952,800 Ending balance units Year 2 Beginning bal units Produced 28,000 28,000 83,000 28,000 78,000 5,000 $54.90 $1,537,200 $4,376,580 Sold (106,000 units) $56.11 $5,913,780 Ending balance units Year 3 Beginning bal units Produced 5,000 85,000 5,000 75,000 $280,550 $56.11 Sold (80,000 units) $55.94 $4,195,500 $4,476,050 4. company uses absorption costing and a LIFO inventory flow assumption:

a) Compute unit product cost under Absorption costing as follows: Year 1 Year 2 Year 3 Direct material Direct Labor Variable manufacturing overhead Fixed manufacturing overhead (W.N 1) Absorption costing unit product cost $28 $28 $28 $17 $17 $17 $4 $4 $4 $7.11 $5.90 $6.94 $54.90 $56.11 $55.94 W.N 1 Year 1 Year 2 Year 3 Fixed manufacturing overhead $590,000 $590,000 $590,000 Units produced 100,000 83,000 85,000 Per unit cost $5.90 $7.11 $6.94 b) Prepare Income statement as follows:

O Brien Absorption Costing Income Statement Year 1 Year 2 Year 3 Sales (A) $5,256,000 $7,738,000 (106,000 units x$73) | (80,000 units x$73) $5,840,000 (72,000 units x $73) COGS (W.N 2) (B) Gross margin (C =A-B) Selling and administrative expenses (D) $6,194,330 $1,543,670 $438,000 ($216000+$120000) ($318000+$120000) $240000+$120000) $3,952,800 $1,303,200 $336,000 $4475,200 $1,364,800 $360,000 Net operating Income (C-D) S967,200 S1,105,670 S1,004,800 W.N 2

LIFO method Year 1 Produced Sold Ending balance units Year 2 Beginning bal units Produced Cost per unit COGS Total Units 100,000 $54.90 $3,952,800 72,000 28,000 $3,952,800 28,000 83,000 83,000 28,000 5,000 $56.11 $4,657,130 $1,537,200 Sold (106,000 units) $6,194,330 $54.90 Ending balance units Year 3 Beginning bal units Produced 5,000 85,000 80,000 $55.94 $4,475,200 $4,475,200 Sold (80,000 units)