Question

Ogilvy Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable cost per unit:
Direct materials	$	35
Fixed costs per year:
Direct labor	$	2,212,000
Fixed manufacturing overhead	$	841,000
Fixed selling and administrative expenses	$	320,000

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 79,000 units and sold 79,000 units. During its second year of operations, it produced 79,000 units and sold 73,400 units. In its third year, Ogilvy produced 79,000 units and sold 84,600 units. The selling price of the company’s product is $78 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 $28 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.

Answer 1

1) a)

	Unit product cost
Year 1	$35
Year 2	$35
Year 3	$35

Unit Product cost under super variable costing = Direct material cost

b)

Ogilvy company

Super Variable Costing Income Statement

Sales $6162000 $5725200 $6598800 Variable cost of goods sold $2765000 $2569000 $2961000 Contribution margin $3397000 $3156200 $3637800 Fixed expenses: Fixed manufacturing expenses $841000 $841000 $841000 Fixed selling and adm. expenses $320000 $320000 $320000 Direct labour $2212000 $2212000 $2212000 Total fixed expenses $3373000 $3373000 $3373000 Net operating income(loss) $24000 ($216800) $264800

2. A)

Unit Product cost under variable costing = Direct material cost+ Direct labor

Unit Product cost under variable costing = 35+28($2212000/79000)

Unit Product cost under variable costing = $ 63

	Unit product cost
Year 1	$63
Year 2	$63
Year 3	$63

B)

Ogilvy company

Variable Costing Income Statement

Year 1 year 2 year 3 Sales $6162000 $5725200 $6598800 Variable cost $4977000 $4624200 $5329800 Contribution margin $1185000 $1101000 $1269000 Fixed expenses: Fixed manufacturing overhead $841000 $841000 $841000 Fixed selling and adm. expenses $320000 $320000 $320000 Total fixed expenses $1161000 $1161000 $1161000 Net income $24000 ($60000) $108000

3)

	Year 1	year 2	year 3
Super Variable costing net operating income (loss)	$24000	-$216800	$264800
Add: Direct labor deferred in inventory under variable costing	$0	$156800	$0
Less: Direct labor released from inventory under variable costing	$0	$0	-$156800
Variable costing net operating income (loss)	$24000	-$60000	$108000

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