Question

C40 А B E F G H 1 1 Case 6-29 Variable & Absorption Costing Unit Product Costs and Income States 2. Presentation 1 3 O'Brien Company manufactures and sells one product. The following information pertains to each of the company's first three years 4 of operations: 5 6 Variable costs per unit: 7 Manufacturing B Direct Materials $ 32.00 9 Direct Labor S 20.00 10 Variable Manufacturing Overhead $ 4.00 11 Variable Selling & Administrative S 3.00 12 Fixed Costs per year: 13 Fixed manufacturing overhead $ 660.00 14 Fixed selling and administrative expenses $ 120,000.00 15 During its first year of operations, O'Brien produced 100,000 units and sold 80,000 units. During its second year of operations, it produced 75,000 units and sold 90,000 units. In its third year, O'Brien produced 80,000 units and sold 75,000 units. The selling 16 price of the company's product is $75 per unit. 17 18 Required: 1. Assume the company uses variable costing and a FIFO inventory flow assumption (FIFO means first-in-first out. In other words, it 19 assumes that the oldest units in Inventory are sold first): a. Compute the unit product cost for Year 1 Year 2, and Year 3. 21 b. Prepare an income statement for Year 1 Year 2, and Year 3. 20 22 2. Assume the company uses variable costing and a LIFO inventory assumption (LFO means last in first-out. In another words, it 24 assumes that the newest units in inventory are sold first: 25 a. Compute the unit product cost for Year 1 Year 2, and Year 3. 26 b. Prepare an income statement for Year 1 Year 2, and Year 3. 27 3. Assume the company uses absorption costing and a FIFO inventory flow assumption (FIFO means first in first-out. In other 29 words, it assumes that the oldest units in Inventory are sold first 30 a. Compute the unit product for Year 1 Year 2, and Year 3. 31 b. Prepare an income statement for Year 1. Year 2, and Year 3. 33 1. Assume the company uses absorption costing and a UFO inventory flow assumption (UFO means last in first-out. In other words, 34 assumes that the newest units in Inventory are sold first) 35 a. Compute the unit product for Year 1 Year 2, and Year 3. b. Prepare an income statement for Year 1 Year 2, and Year 37 39 45 50 51 Sheet1

Answer 1

Solution:

Year 3 Requirement 1 (a) Computation of Unit Product Cost for Year 1, Year 2 and Year 3 Year 1 Year 2 Direct Materials $32.00 $32.00 Direct Labor $20.00 $20.00 Variable manufacturing overhead $4.00 $4.00 Unit Product Cost $56.00 $56.00 $32.00 $20.00 $4.00 $56.00 (b) Income Statement (Variable Costing and FIFO Method) Year 1 Year 2 Year 3 $60,00,000 $67,50,000 $56,25,000 Sales Revenue (A) Less: Variable Cost Direct Materials Direct Labor Variable manufacturing OH Variable selling & admin. Expense Total Variable cost (B) $25,60,000 $28,80,000 $24,00,000 $16,00,000 $18,00,000 $15,00,000 $3,20,000 $3,60,000 $3,00,000 $2,40,000 $2,70,000 $2,25,000 $47,20,000 $53,10,000 $44,25,000 $12,80,000 $14,40,000 $12,00,000 Contribution Margin (A-B) Less: Fixed Costs Fixed manufacturing OH Fixed selling & admin. Expense Total Fixed Costs $6,60,000 $1,20,000 $7,80,000 $6,60,000 $1,20,000 $7,80,000 $6,60,000 $1,20,000 $7,80,000 Operating Income $5,00,000 $6,60,000 $4,20,000

Requirement 2 (a) Computation of Unit Product Cost for Year 1, Year 2 and Year 3 Year 1 Year 2 Direct Materials $32.00 $32.00 Direct Labor $20.00 $20.00 Variable manufacturing overhead $4.00 $4.00 Unit Product Cost $56.00 $56.00 Year 3 $32.00 $20.00 $4.00 $56.00 (b) Income Statement (Variable Costing and LIFO Method) Year 1 Year 2 Year 3 $60,00,000 $67,50,000 $56,25,000 Sales Revenue (A) Less: Variable Cost Direct Materials Direct Labor Variable manufacturing OH Variable selling & admin. Expense Total Variable cost (B) $25,60,000 $28,80,000 $24,00,000 $16,00,000 $18,00,000 $15,00,000 $3,20,000 $3,60,000 $3,00,000 $2,40,000 $2,70,000 $2,25,000 $47,20,000 $53,10,000 $44,25,000 $12,80,000 $14,40,000 $12,00,000 Contribution Margin (A-B) Less: Fixed Costs Fixed manufacturing OH Fixed selling & admin. Expense Total Fixed Costs $6,60,000 $1,20,000 $7,80,000 $6,60,000 $1,20,000 $7,80,000 $6,60,000 $1,20,000 $7,80,000 Operating Income $5,00,000 $6,60,000 $4,20,000

Year 3 Requirement 3 (a) Computation of Unit Product Cost for Year 1, Year 2 and Year 3 Year 1 Year 2 Direct Materials $32.00 $32.00 Direct Labor $20.00 $20.00 Variable manufacturing overhead $4.00 $4.00 Fixed manufacturing overhead $6.60 $8.80 (Fixed Manuf. OH + No. units produced) Unit Product Cost $62.60 $64.80 $32.00 $20.00 $4.00 $8.25 $64.25 (b) Income Statement (Absorption Costing and FIFO Method) Year 1 Year 2 Year 3 $60,00,000 $67,50,000 $56,25,000 $50,08,000 $58,32,000 $48,18,750 $9,92,000 $9,18,000 $8,06,250 Sales Revenue Less: Cost of Goods Sold (No. of units sold * Unit product cost) Gross Profit Less: Selling & Admin. Expense Variable Selling & Admin. Expense Fixed selling & admin. Expense Total Selling & Admin. Expense $2,40,000 $1,20,000 $3,60,000 $2,70,000 $1,20,000 $3,90,000 $2,25,000 $1,20,000 $3,45,000 Operating Income $6,32,000 $5,28,000 $4,61,250

Year 3 Requirement 4 (a) Computation of Unit Product Cost for Year 1, Year 2 and Year 3 Year 1 Year 2 Direct Materials $32.00 $32.00 Direct Labor $20.00 $20.00 Variable manufacturing overhead $4.00 $4.00 Fixed manufacturing overhead $6.60 $8.80 (Fixed Manuf. OH + No. units produced) Unit Product Cost $62.60 $64.80 $32.00 $20.00 $4.00 $8.25 $64.25 (b) Income Statement (Absorption Costing and LIFO Method) Year 1 Year 2 Year 3 $60,00,000 $67,50,000 $50,08,000 $58,32,000 $56,25,000 $48,18,750 $9,92,000 $9,18,000 $8,06,250 Sales Revenue Less: Cost of Goods Sold (No. of units sold * Unit product cost) Gross Profit Less: Selling & Admin. Expense Variable Selling & Admin. Expense Fixed selling & admin. Expense Total Selling & Admin. Expense $2,40,000 $1,20,000 $3,60,000 $2,70,000 $1,20,000 $3,90,000 $2,25,000 $1,20,000 $3,45,000 Operating Income $6,32,000 $5,28,000 $4,61,250