Question

Case 6-29 Variable & Absorption Costing Unit Product Costs and Income States

Presentation 1

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

Year 1 Points from Given Information Particulars Beginning Inventory Add : Production Less : Sales Ending Inventory 100,000 80,000 20,000 Year 2 20,000 75,000 90,000 5,000 Year 3 5,000 80,000 75,000 10,000 75 $ $ Sales Price Variable Selling & Administrative Expenses Fixed Manufacturing Overheads Fixed Selling and Administrative Expenses 3 660,000 120,000 Year 1 Year 2 Year 3 32 Requirement 1A Unit Product Cost Particulars Direct Materials Direct Labor Variable Manufacturing Overheads Total Unit Product Cost $ A A A A 32 $ 20 $ 4 $ 56 $ 32 $ 20 $ 4 $ 56 $ 20 4 56

Requirement 1B | Variable Costing Income Statement O'Brien Company Variable Costing Income Statement Particulars Year 1 Year 2 Year 3 Sales $ 6,000,000 $ 6,750,000 $ 5,625,000 Variable Expenses : - Variable Cost of Goods Sold - Variable Selling & Administrative Expenses Total Variable Expenses $ 4,480,000 $ 5,040,000 $4,200,000 $ 240,000 $ 270,000 $ 225,000 $ 4,720,000 $ 5,310,000 $ 4,425,000 Contribution Margin $ 1,280,000 $ 1,440,000 $ 1,200,000 Fixed Expenses : - Fixed Manufacturing Overheads $ - Fixed Selling and Administrative Overheads $ Total Fixed Expenses $ 660,000 $ 120,000 $ 780,000 $ 660,000 $ 120,000 $ 780,000 $ 660,000 120,000 780,000 Net Operating Income $ 500,000 $ 660,000 $ 420,000 Year 1 Year 2 Year 3 Requirement 2A | Unit Product Cost Particulars Direct Materials Direct Labor Variable Manufacturing Overheads Total Unit Product Cost A A A A 32 $ 20 $ 4 $ 56 $ 32 $ 20 $ 4 $ 56 $ 32 20 4 56 $ $

Requirement 2B Variable Costing Income Statement O'Brien Company Variable Costing Income Statement Particulars Year 1 Year 2 Year 3 Sales $ 6,000,000 $ 6,750,000 $ 5,625,000 Variable Expenses : - Variable Cost of Goods Sold - Variable Selling & Administrative Expenses Total Variable Expenses $ 4,480,000 $ 5,040,000 $4,200,000 $ 240,000 $ 270,000 $ 225,000 $ 4,720,000 $5,310,000 $4,425,000 Contribution Margin $ 1,280,000 $ 1,440,000 $ 1,200,000 Fixed Expenses : - Fixed Manufacturing Overheads $ - Fixed Selling and Administrative Overheads $ Total Fixed Expenses $ 660,000 $ 120,000 $ 780,000 $ 660,000 $ 120,000 $ 780,000 $ 660,000 120,000 780,000 Net Operating Income $ 500,000 $ 660,000 $ 420,000 Note : As per Chegg Guidelines, Only 1 Question (or) 4 Sub-Questions to be answered. Please repost the remaining questions as a separate post. If you require any explanation in the solution provided, Please Leave a Comment and I will be glad to Help You...