Question

PROBLEM 4A-4 Super-Variable Costing and Variable Costing Unit Product Costs and Income Statements L04-2, L04-6 Ogilvy Company manufactures and sells one product. The following information pertains to each of the company's first three years of operations: Page 225 $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.

Answer 1

Solution:

1.) Assuming the company uses super variable costing:

a.)

Particular	Year 1	Year 2	Year 3
Direct materials per unit	$16	$16	$16
Product cost	$16	$16	$16

* Under super variable costing, only direct materials cost is included product cost. So, the product cost $16 for all of three years.

b.) Income Statement

Particular	Year 1	Year 2	Year 3
Sales units	60,000	55,000	65,000
Sales Revenue ($45 per unit)	$2,700,000	$2,475,000	$2,925,000
Less: variable cost:
Direct materials ($16 per unit)	$960,000	$880,000	$1,040,000
Contribution	$1,740,000	$1,595,000	$1,885,000
Less: Fixed cost
Direct labor	$540,000	$540,000	$540,000
Fixed manufacturing overhead	$822,000	$822,000	$822,000
Fixed selling and administrative expenses	$370,000	$370,000	$370,000
Profit	$8,000	$(137,000)	$153,000

2.) Assuming that company uses variable costing system:

a.)

Particular	Year 1	Year 2	Year 3
Direct materials	$16	$16	$16
Direct labor	$9	$9	$9
Product unit cost	$25	$25	$25

b.) Income Statement

Particular	Year 1	Year 2	Year 3
Sales units	60,000	55,000	65,000
Sales revenue ($45 per unit)	$2,700,000	$2,475,000	$2,925,000
Less : variable cost
Direct materials ($16 per unit)	$960,000	$880,000	$1,040,000
Direct labor ($9 per unit)	$540,000	$495,000	$585,000
Contribution margin	$1,200,000	$1,100,000	$1,300,000
Less: Fixed cost
Fixed manufacturing overhead	$822,000	$822,000	$822,000
Fixed selling and administrative expenses	$370,000	$370000	$370,000
Profit	$8,000	$(92,000)	$108,000

3.)

Particular	Year 1	Year 2	Year 3
Profit as per super variable costing method	$8000	$(137000)	$153,000
Profit as per variable cost method	$8000	$(92,000)	$108,000
Direct labor cost deferred in inventory	0	$(45,000)	$45,000