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	$520,000
Fixed selling and administrative expenses	$140,000

During its first year of operations, O’Brien produced 96,000 units and sold 78,000 units. During its second year of operations, it produced 76,000 units and sold 89,000 units. In its third year, O’Brien produced 84,000 units and sold 79,000 units. The selling price of the company’s product is $78 per unit.

1.

value:
6.25 points

Required information

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.

References

eBook & Resources

Financial StatementsLearning Objective: 05-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.

Difficulty: 3 HardLearning Objective: 05-02 Prepare income statements using both variable and absorption costing.

Check my work

2.

value:
6.25 points

Required information

2. Assume the company uses variable 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.

References

eBook & Resources

Financial StatementsLearning Objective: 05-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.

Difficulty: 3 HardLearning Objective: 05-02 Prepare income statements using both variable and absorption costing.

Check my work

3.

value:
6.25 points

Required information

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 cost for Year 1, Year 2, and Year 3. (Round your intermediate calculations and final answers to 2 decimal places.)

b. Prepare an income statement for Year 1, Year 2, and Year 3. (Round your intermediate calculations to 2 decimal places.)

References

eBook & Resources

Financial StatementsLearning Objective: 05-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.

Difficulty: 3 HardLearning Objective: 05-02 Prepare income statements using both variable and absorption costing.

Check my work

4.

value:
6.25 points

Required information

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. (Round your intermediate calculations and final answers to 2 decimal places.)

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

Answer 1

Req 1.
Compute the Variable costing Unit Product cost
				Year 1	Year 2	Year 3
Direct Material				28	28	28
Direct labour				15	15	15
Variable Manufacturing overheads				4	4	4
Variable costing unit prroduct cost				47	47	47
Construct The Variable Costing Income Statement under FIFO
				YEAR 1		YEAR 2		Year 3
Sales					6,084,000		6,942,000		6,162,000
Less: Variable cost
variable cost of goods sold				3,666,000		4,183,000		3,713,000
Variable selling expense				234,000	3,900,000	267,000	4,450,000	237,000	3,950,000
Contribution margin					2,184,000		2,492,000		2,212,000
Fixed expense:
Fixed Manufacturing overheads					520,000		520,000		520,000
Fixed selling expense					140,000		140,000		140,000
Net operating Income					1,524,000		1,832,000		1,552,000
Req 2.
Compute the Variable costing Unit Product cost
				Year 1	Year 2	Year 3
Direct Material				28	28	28
Direct labour				15	15	15
Variable Manufacturing overheads				4	4	4
Variable costing unit prroduct cost				47	47	47
Construct The Variable Costing Income Statement under LIFO
				YEAR 1		YEAR 2		Year 3
Sales					6,084,000		6,942,000		6,162,000
Less: Variable cost
variable cost of goods sold				3,666,000		4,183,000		3,713,000
Variable selling expense				234,000	3,900,000	267,000	4,450,000	237,000	3,950,000
Contribution margin					2,184,000		2,492,000		2,212,000
Fixed expense:
Fixed Manufacturing overheads					520,000		520,000		520,000
Fixed selling expense					140,000		140,000		140,000
Net operating Income					1,524,000		1,832,000		1,552,000
Req 3.
Construct The Absorption Costing Unit Product Cost
				Year 1	Year 2	Year 3
Direct Material				28	28	28
Direct labour				15	15	15		Fixed MOH:
Variable Manufacturing overheads				4	4	4		YEar1 = 520000/96000= 5.42
Fixed Manufacturing overheads				5.42	6.84	6.19		YEar2 = 520000/76000= 6.84
Absorption costing unit prroduct cost				52.42	53.84	53.19		Year3 = 520000/84000= 6.19
Construct the Absorption Costing Income Statement Under FIFO
				Year 1	Year 2	Year 3
Sales				$6,084,000	$6,942,000	6162000		COGS
Cost of Goods sold				4088760	4766200	4205260		Year1 = 78000*52.42 = 4088760
Gross Margin				$1,995,240	$2,175,800	1956740		Year 2 = 18000*52.42+71000*53.84 =4766200
Selling and distribution expense				374,000	407,000	251000		Year3 = 5000*53.84+74000*53.19 = 4205260
Net operating income				1,621,240	1,768,800	1705740
Req 4.
Construct The Absorption Costing Unit Product Cost
				Year 1	Year 2	Year 3
Direct Material				28	28	28
Direct labour				15	15	15		Fixed MOH:
Variable Manufacturing overheads				4	4	4		YEar1 = 520000/96000= 5.42
Fixed Manufacturing overheads				5.42	6.84	6.19		YEar2 = 520000/76000= 6.84
Absorption costing unit prroduct cost				52.42	53.84	53.19		Year3 = 520000/84000= 6.19
Construct the Absorption Costing Income Statement Under LIFO
				Year 1	Year 2	Year 3
Sales				$6,084,000	$6,942,000	6162000		COGS
Cost of Goods sold				4088760	4773300	4467960		Year1 = 78000*52.42 = 4088760
Gross Margin				$1,995,240	$2,168,700	1694040		Year 2 = 76000*53.84+13000*52.42 = 4773300
Selling and distribution expense				374,000	407,000	251000		Year3 = 84000*53.19=4467960
Net operating income				1,621,240	1,761,700	1443040