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	$	35
Fixed costs per year:
Direct labor	$	2,212,000
Fixed manufacturing overhead	$	841,000
Fixed selling and administrative expenses	$	320,000

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 79,000 units and sold 79,000 units. During its second year of operations, it produced 79,000 units and sold 73,400 units. In its third year, Ogilvy produced 79,000 units and sold 84,600 units. The selling price of the company’s product is $78 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 $28 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.

1b

Prepare an income statement for Year 1, Year 2, and Year 3. Assume the company uses super-variable costing.

	Ogilvy Company Super-Variable Costing Income Statement Year 1 Year 2 Year 3 0 0 0 Fixed expenses: Total fixed expenses 0 0 0 Net operating income(loss) $0 $0 $0

2a

Compute the unit product cost for Year 1, Year 2, and Year 3. Assume the company uses a variable costing system that assigns $28 of direct labor cost to each unit produced.

	Unit Product Cost Year 1 Year 2 Year 3

2b

Prepare an income statement for Year 1, Year 2, and Year 3. Assume the company uses a variable costing system that assigns $28 of direct labor cost to each unit produced.

	Ogilvy Company Variable Costing Income Statement Year 1 Year 2 Year 3 0 0 0 Fixed expenses: Total fixed expenses 0 0 0 Net operating income (loss) $0 $0 $0

req 3

Reconcile the difference between the super-variable costing and variable costing net operating incomes in Years 1, 2, and 3.

	Year 1 Year 2 Year 3 Super-variable costing net operating income (loss) Variable costing net operating income (loss) $0 $0 $0

Answer 1

		Unit product
Req 1A)		cost
	Year 1	35
	year 2	35
	year 3	35
				79,000	73,400	84,600
Req 1B)	Super Variable costing income statement
				Year 1	Year 2	Year 3
	Sales			6162000	5725200	6598800
	Variable cost of goods sold			2765000	2569000	2961000
	Contribution margin			3397000	3156200	3637800
	Fixed expenses:
	Direct Labor			2,212,000	2,212,000	2,212,000
	fixed manufacturing overhead			841,000	841,000	841,000
	Fixed selling and Administrative			320,000	320,000	320,000
	Total fixed expenses			3,373,000	3,373,000	3,373,000
	Net operating income(loss)			24,000	-216,800	264,800
		Unit product
Req 2A		cost
	Year 1	63
	year 2	63
	year 3	63
Req 2B)				79,000	73,400	84,600
	Variable costing income statement
				Year 1	Year 2	Year 3
	Sales			6162000	5725200	6598800
	Variable cost of goods sold			4977000	4624200	5329800
	Contribution margin			1185000	1101000	1269000
	Fixed expenses:
	fixed manufacturing overhead			841,000	841,000	841,000
	Fixed selling and Administrative			320,000	320,000	320,000
	Total fixed expenses			1,161,000	1,161,000	1,161,000
	Net operating income(loss)			24,000	-60,000	108,000
Req 3						Year 1	Year 2	Year 3
	Super- variable Costing net operating income (loss)					24,000	-216,800	264,800
	Direct labor cost deferred in inventory under variable costing					0	156800
	Direct labor cost releasedin beginning inventory under variable costing							-156,800
	Variable Costing net operating income (loss)					24,000	-60,000	108,000