Question

Case 6-29 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2]

[The following information applies to the questions displayed below.]

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	$	27
Direct labor	$	15
Variable manufacturing overhead	$	4
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	580,000
Fixed selling and administrative expenses	$	110,000

During its first year of operations, O’Brien produced 91,000 units and sold 79,000 units. During its second year of operations, it produced 84,000 units and sold 91,000 units. In its third year, O’Brien produced 83,000 units and sold 78,000 units. The selling price of the company’s product is $78 per unit.

Case 6-29 Part-1

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.

Answer 1

Solution 1a:

Computation of Unit Product Cost - Variable Costing
Particulars	Year 1	Year 2	Year 3
Unit Product Cost:
Direct material	$27.00	$27.00	$27.00
Direct Labor	$15.00	$15.00	$15.00
Variable manufacturing overhead	$4.00	$4.00	$4.00
Unit product cost	$46.00	$46.00	$46.00

Solution 1b:

O' Brien Company
Variable costing income statement For Year 1, Year 2 and Year 3
Particulars	Per unit	Year 1	Year 2	Year 3
Sales	$78.00	$6,162,000.00	$7,098,000.00	$6,084,000.00
Variable Cost:
Variable manufacturing cost	$46.00	$3,634,000.00	$4,186,000.00	$3,588,000.00
Variable Selling and Administrative Expenses	$3.00	$237,000.00	$273,000.00	$234,000.00
Contribution	$29.00	$2,291,000.00	$2,639,000.00	$2,262,000.00
Fixed Expenses:
Fixed Manufacturing Overhead		$580,000.00	$580,000.00	$580,000.00
Fixed Selling & Administrative Expenses		$110,000.00	$110,000.00	$110,000.00
Total Fixed Expenses		$690,000.00	$690,000.00	$690,000.00
Net Operating Income		$1,601,000.00	$1,949,000.00	$1,572,000.00