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	$	30
Fixed costs per year:
Direct labor	$	1,702,000
Fixed manufacturing overhead	$	836,000
Fixed selling and administrative expenses	$	290,000

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 74,000 units and sold 74,000 units. During its second year of operations, it produced 74,000 units and sold 69,400 units. In its third year, Ogilvy produced 74,000 units and sold 78,600 units. The selling price of the company’s product is $69 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 $23 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

Answer 1-a.
Super Variable Costing
Calculation of Unit Product Cost:
	Year
	1	2	3
Direct Material	30.00	30.00	30.00
Total Unit Product Cost	30.00	30.00	30.00
Answer 1-b.
Income Statement
Under Super Variable Costing
	Year
	1	2	3
Sales in Units	74,000.00	69,400.00	78,600.00
SP per Unit	69.00	69.00	69.00
Sales	5,106,000.00	4,788,600.00	5,423,400.00
Cost of Goods Sold	2,220,000.00	2,082,000.00	2,358,000.00
Contribution Margin	2,886,000.00	2,706,600.00	3,065,400.00
Fixed Cost
Direct Labor	1,702,000.00	1,702,000.00	1,702,000.00
Fixed MOH	836,000.00	836,000.00	836,000.00
Fixed Selling & Admn. Expenses	29,000.00	29,000.00	29,000.00
Total Fixed Costs	2,567,000.00	2,567,000.00	2,567,000.00
Net Income	319,000.00	139,600.00	498,400.00
	Year
	1	2	3
No. of Units Manufactured	74,000.00	74,000.00	74,000.00
No. of Units Sold	74,000.00	69,400.00	78,600.00
Ending Inventory in Units	-	4,600.00	-
Total Unit Product Cost	30.00	30.00	30.00
Cost oF Good Sold	2,220,000.00	2,082,000.00	2,358,000.00
Ending Inventory	-	138,000.00	-
Answer 2-a.
Variable Costing
	Year
	1	2	3
Direct Material	30.00	30.00	30.00
Direct Labor	23.00	23.00	23.00
Total Unit Product Cost	53.00	53.00	53.00
Answer 2-b.
Income Statement
Under Super Costing
	Year
	1	2	3
Sales in Units	74,000.00	69,400.00	78,600.00
SP per Unit	69.00	69.00	69.00
Sales	5,106,000.00	4,788,600.00	5,423,400.00
Cost of Goods Sold	3,922,000.00	3,678,200.00	4,165,800.00
Contribution Margin	1,184,000.00	1,110,400.00	1,257,600.00
Fixed Cost
Fixed MOH	836,000.00	836,000.00	836,000.00
Fixed Selling & Admn. Expenses	29,000.00	29,000.00	29,000.00
Total Fixed Costs	865,000.00	865,000.00	865,000.00
Net Income	319,000.00	245,400.00	392,600.00
	Year
	1	2	3
No. of Units Manufactured	74,000.00	74,000.00	74,000.00
No. of Units Sold	74,000.00	69,400.00	78,600.00
Ending Inventory in Units	-	4,600.00	-
Total Unit Product Cost	53.00	53.00	53.00
Cost oF Good Sold	3,922,000.00	3,678,200.00	4,165,800.00
Ending Inventory	-	243,800.00	-
Answer 3.
Recnciliation Statement
	Year
	1	2	3
Net Income - Super Variable Costing	319,000.00	139,600.00	498,400.00
Labor Cost in Ending Inventory	-	105,800.00	(105,800.00)
Net Income - Variable Costing	319,000.00	245,400.00	392,600.00