Question

Ogilvy Company manufactures and sells one product. The following information pertains to each of the company's first three years of operations: 32 Variable cost per unit. Direct materials Pixed coats per year! Direct labor Fixed manufacturing overhead Fixed selling and administrative expenses $1,900,000 $ 851,000 $302,000 The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 76,000 units and sold 76,000 units. During its second year of operations, it produced 76,000 units and sold 71,000 units. In its third year, Ogilvy produced 76,000 units and sold 81,000 units. The selling price of the company's product is $73 per unit. Required: 1. Assume the company uses super-variable costing: 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 a variable costing system that assigns $25 of direct labor cost to each unit produced: 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. Reconcile the difference between the super-variable costing and variable costing net operating incomes in Years 1, 2 and 3. (Enter any losses or deductions as a negative value.) Complete this question by entering your answers in the tabs below.

Answer 1

1) Under Super-Variable Costing

a) Unit product cost

	Unit product cost
Year 1	$32
Year 2	$32
Year 3	$32

In Super variable costing only direct materials is considered for the purpose of unit product cost.

b) Income Statement

Ogilvy Company
Super-Variable Costing Income Statement
	Year 1	Year 2	Year 3
Sales	(76000*73)= $5548000	(71000*73)= $5183000	(81000*73)= $5913000
Less: Variable cost
Direct materials	(76000*32)= -2432000	(71000*32)= -2272000	(81000*32)= -2592000
Contribution margin	3116000	2911000	3321000
Less: Fixed cost
Direct labor	1900000	1900000	1900000
Fixed manufacturing overhead	851000	851000	851000
Fixed selling and administrative expenses	302000	302000	302000
Total fixed expenses	-3053000	-3053000	-3053000
Net operating income (loss)	$63000	$-142000	$268000

2) Under Variable costing

a) Unit product cost

	Year 1	Year 2	Year 3
Direct materials	$32	$32	$32
Direct labor	25	25	25
Unit product cost	$57	$57	$57

b) Income Statement

Ogilvy Company
Variable Costing Income Statement
	Year 1	Year 2	Year 3
Sales	(76000*73)= $5548000	(71000*73)= $5183000	(81000*73)= $5913000
Less: Variable cost
Cost of goods sold	(76000*57)= -4332000	(71000*57)= -4047000	(81000*57)= -4617000
Contribution margin	1216000	1136000	1296000
Less: Fixed cost
Fixed manufacturing overhead	851000	851000	851000
Fixed selling and administrative expenses	302000	302000	302000
Total fixed expenses	-1153000	-1153000	-1153000
Net operating income (loss)	$63000	$-17000	$143000

3)

	Year 1	Year 2	Year 3
Super-variable costing net operating income (loss)	$63000	$-142000	$268000
Add: Direct labor costs deferred in inventory (5000*25)	0	125000	0
Less: Direct labor costs released from inventory (5000*25)	0	0	-125000
Variable costing net operating income (loss)	$63000	$-17000	$143000