Question

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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	$	29
Direct labor	$	14
Variable manufacturing overhead	$	4
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	580,000
Fixed selling and administrative expenses	$	100,000

During its first year of operations, O’Brien produced 94,000 units and sold 72,000 units. During its second year of operations, it produced 79,000 units and sold 96,000 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 $76 per unit.

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.

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

Answer 1

Question 3

Part A

Calculation of Unit Product Cost using Absorption Costing

Particulars	Year 1	Year 2	Year 3
Direct Materials Cost per Unit	29	29	29
Direct Labour Cost per Unit	14	14	14
Variable Manufacturing Costs per Unit	4	4	4
Fixed Manufacturing Overhead per Unit	6.17	7.34	6.59
Unit Product Cost	53.17	54.34	53.59

Particulars	Year 1	Year 2	Year 3
Fixed Manufacturing Overhead	580,000	580,000	580,000
÷ Total Units Produced each Year	94,000	79,000	88,000
Fixed Manufacturing Costs per Unit	6.17	7.34	6.59

Part B

Absorption Costing Income Statement

Particulars	Year 1	Year 2	Year 3
Sales Revenue	54,72,000	72,96,000	63,08,000
Less: Cost of Goods Sold	38,28,240	51,90,900	44,51,720
Gross Profit	16,43,760	21,05,100	18,56,280
Less: Selling and Administrative Expenses
Variable Selling and Administrative Expenses	144,000	192,000	166,000
Fixed Selling and Administrative Expenses	100,000	100,000	100,000
Total Selling and Administrative Expenses	244,000	292,000	266,000
Net Income / (Loss)	13,99,760	18,13,100	15,90,280

Gross Profit = Sales Revenue - Cost of Goods Sold

Net Income = Gross Profit - Total Selling and Administrative Expenses

Total Selling and Administrative Expenses = Variable Selling and Administrative Expenses + Fixed Selling and Administrative Expenses

Notes:-

Calculation of Costs of Goods Sold

For Year 1

72,000 Units * $ 53.17 per Unit = $ 38,28,240

For Year 2

22,000 Units * $ 53.17 Per Unit = $ 11,69,740

74,000 Units * $ 54.34 Per Unit = $ 40,21,160

Total Costs of Goods Sold Year 2 = $ 51,90,900

For Year 3

5,000 Units * $ 54.34 per Unit = $ 271,700

78,000 Units * $ 53.59 per Unit = $ 41,80,020

Total Cost of Goods Sold Year 3 = $ 44,51,720

Particulars	Year 1	Year 2	Year 3
Sales in Units	72,000	96,000	83,000
* Sales Price per Unit	76	76	76
Sales Revenue	54,72,000	72,96,000	63,08,000

Particulars	Year 1	Year 2	Year 3
Sales in Units	72,000	96,000	83,000
* Variable Selling and Administrative Expenses per Unit	2	2	2
Variable Selling and Administrative Expenses	144,000	192,000	166,000