Question

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 32

Direct Labor 20

Variable Manufacturing Overhead 4

Variable Selling & Administrative 3

Fixed Costs per year:

Fixed manufacturing overhead 660

Fixed selling and administrative expenses 120,000

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 price of the company's product is $75 per unit.

Required:

1. Assume the company uses variable 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.

2. Assume the company uses variable costing and a LIFO inventory assumption (LIFO means last-in first-out. In another 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 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 for Year 1, Year 2, and Year 3.

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

Answer 1

Requirement 3A | Unit Product Cost Particulars Direct Materials Direct Labor Variable Manufacturing Overheads Fixed Manufacturing Overheads Total Unit Product Cost $ $ $ $ $ Year 1 32.00 $ 20.00 $ 4.00 $ 6.60 $ 62.60 $ Year 2 32.00 $ 20.00 $ 4.00 $ 8.80 $ 64.80 $ Year 3 32.00 20.00 4.00 8.25 64.25 Requirement 3B | Absorption Costing Income Statement O'Brien Company Absorption Costing Income Statement Particulars Year 1 Year 2 Year 3 Sales $ 6,000,000 $ 6,750,000 $ 5,625,000 Cost of Goods Sold $ 5,008,000 $ 5,788,000 $ 4,821,500 Gross Margin $ 992,000 $ 962,000 $ 803,500 Selling and Administrative Expenses $ 360,000 $ 390,000 $ 345,000 Net Operating Income $ 632,000 $ 572,000 $ 458,500 Year 3 Cost of Goods Sold Particulars Units from Year 1 Year 1 Product Cost Cost Year 1 Year 2 $ 80,000 $ 20,000 $ $ 62.60 $ 62.60 $ $ 5,008,000 $ 1,252,000 $ 62.60 Units from Year 2 Year 2 Product Cost Cost $ $ $ 70,000 $ 64.80 $ 64.80 $ $ 4,536,000 $ 5,000 64.80 324,000 - Units from Year 3 Year 3 Product Cost Cost $ $ $ 64.25 $ $ $ 70,000 64.25 $ 64.25 $ 4,497,500 Total Cost of Goods Sold $ 5,008,000 $ 5,788,000 $ 4,821,500

Requirement 4A | Unit Product Cost Particulars Direct Materials Direct Labor Variable Manufacturing Overheads Fixed Manufacturing Overheads Total Unit Product Cost $ $ $ $ $ Year 1 32.00 $ 20.00 $ 4.00 $ 6.60 $ 62.60 $ Year 2 32.00 $ 20.00 $ 4.00 $ 8.80 $ 64.80 $ Year 3 32.00 20.00 4.00 8.25 64.25 Requirement 4B | Absorption Costing Income Statement O'Brien Company Absorption Costing Income Statement Particulars Year 1 Year 2 Year 3 Sales $ 6,000,000 $ 6,750,000 $ 5,625,000 Cost of Goods Sold $ 5,008,000 $ 5,799,000 $ 4,818,750 Gross Margin $ 992,000 $ 951,000 $ 806,250 Selling and Administrative Expenses $ 360,000 $ 390,000 $ 345,000 Net Operating Income 632,000 $ 561,000 $ 461,250 $ Year 3 Cost of Goods Sold Particulars Units from Year 1 Year 1 Product Cost Cost AAA Year 1 $ 80,000 $ $ 62.60 $ $ 5,008,000 $ Year 2 15,000 $ 62.60 $ 939,000 $ 62.60 Units from Year 2 Year 2 Product Cost Cost $ $ $ $ 75,000 64.80 $ 64.80 $ $ 4,860,000 $ 64.80 Units from Year 3 Year 3 Product Cost Cost $ $ $ $ 64.25 $ $ $ 75,000 64.25 $ 64.25 $ 4,818,750 Total Cost of Goods Sold $ 5,008,000 $ 5,799,000 $ 4,818,750

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