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	$	28
Direct labor	$	15
Variable manufacturing overhead	$	4
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	570,000
Fixed selling and administrative expenses	$	110,000

During its first year of operations, O’Brien produced 91,000 units and sold 71,000 units. During its second year of operations, it produced 76,000 units and sold 91,000 units. In its third year, O’Brien produced 88,000 units and sold 83,000 units. The selling price of the company’s product is $79 per unit.

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 cost for Year 1, Year 2, and Year 3.

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

Unit Product Cost Year 1 Year 2 Year 3

• 	O’Brien Company Absorption Costing Income Statement Year 1 Year 2 Year 3 0 0 0 $0 $0 $0

Answer 1

Requirement A:

Computation of Unit Product Cost:

Particulars	Year 1	Year 2	Year 3
Direct Materials	28	28	28
Direct labor	15	15	15
Variable manufacturing OH	4	4	4
Fixed manufacturing overhead(570000/91000,76000,88000)	6.26	7.5	6.48
Unit Product Cost	53.26	54.5	53.48

Requirement B:

O’Brien Company
Absorption Costing Income Statement
Particulars	Year 1	Year 2	Year 3
Sales		5609000		7189000		6557000
Less COGS :
Opening Inventory	0		1065200		266300
(+) Cost of goods manufactured	4846660		4142000		4706240
Less Closing Inventory	-1065200	3781460	-266300	4940900	-533700	4438840
Gross Profit		1827540		2248100		2118160
Less selling & admin Expense
Variable selling & admin expense	273000		228000		264000
Fixed selling & admin expense	110000	383000	110000	338000	110000	374000
Net operating Income		1444540		1910100		1744160

Closing inventory value for year 1 = 53.26*20000 = 1065200

Closing inventory value for year 2 = 5000*53.26 = 266300

Closing inventory value for year 3 = (5000*53.26)+(5000*53.48) = 533700