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	$	36
Fixed costs per year:
Direct labor	$	2,320,000
Fixed manufacturing overhead	$	842,000
Fixed selling and administrative expenses	$	326,000

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 80,000 units and sold 80,000 units. During its second year of operations, it produced 80,000 units and sold 74,200 units. In its third year, Ogilvy produced 80,000 units and sold 85,800 units. The selling price of the company’s product is $80 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 $29 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.

Answer 1

Given Information - Company uses super variable costing

Particulars	Year 1	Year 2	Year 3
Unit Produced	80000	80000	80000
Units Sale	80000	74200	85800
Opening Units	0	0	5800
Closing units	0	5800	0
Direct material Cost per unit	36	36	36
Fixed Cost per year:
Direct labor	2320000	2320000	2320000
Fixed manufacturing overhead	842000	842000	842000
Fixed selling & administrative expense	326000	326000	326000

1. (a.) Computation of Unit product cost for Year 1, 2 & 3 -

	Computation of Unit product cost
	Particulars	Year 1	Year 2	Year 3
	Material cost (36*80000)	2880000	2880000	2880000
	Direct labor	2320000	2320000	2320000
	Fixed manufacturing overhead	842000	842000	842000
	Total manufacturing overeheads	6042000	6042000	6042000
add	Opening FG (opening units*36)	0	0	208800
less	Closing FG (Closing units * 36)	0	208800	0
	Cost of goods sold	6042000	5833200	6250800
	Units sold	80000	74200	85800
	Unit Product Cost	75.53	78.61	72.85

1. (b.) Preparation of Income statement -

Income Statement
Oglivy Company
Particulars	Year 1	Year 2	Year 3
Sales ( 80*80000),(80*74200),(80*85800)	6400000	5936000	6864000
Material cost (36*80000)	2880000	2880000	2880000
Direct labor	2320000	2320000	2320000
Fixed manufacturing overhead	842000	842000	842000
Total manufacturing overheads	6042000	6042000	6042000
Opening FG (opening units*36)	0	0	208800
Closing FG (Closing units * 36)	0	208800	0
Cost of goods sold	6042000	5833200	6250800
Fixed Selling & administrative expenses	326000	326000	326000
Cost of sales	6368000	6159200	6576800
Net Income (Sales - Cost of sales)	32000	-223200	287200

2. (a) Computation of Unit product cost under variable costing -

	Computation of Unit product cost
	Particulars	Year 1	Year 2	Year 3
	Material cost (36*80000)	2880000	2880000	2880000
	Direct labor (29*80000)	2320000	2320000	2320000
	Fixed manufacturing overhead	842000	842000	842000
	Total manufacturing overeheads	6042000	6042000	6042000
add	Opening FG (opening units*(36+29)	0	0	377000
less	Closing FG (Closing units * (36+29)	0	377000	0
	Cost of goods sold	6042000	5665000	6419000
	Units sold	80000	74200	85800
		75.53	76.35	74.81

2 (b) Preparation of Income statement under variable costing -

Income Statement
Oglivy Company
Particulars	Year 1	Year 2	Year 3
Sales ( 80*80000),(80*74200),(80*85800)	6400000	5936000	6864000
Material cost (36*80000)	2880000	2880000	2880000
Direct labor (29*80000)	2320000	2320000	2320000
Fixed manufacturing overhead	842000	842000	842000
Total manufacturing overheads	6042000	6042000	6042000
Opening FG (opening units*(36+29)	0	0	377000
Closing FG (Closing units * (36+29)	0	377000	0
Cost of goods sold	6042000	5665000	6419000
Fixed Selling & administrative expenses	326000	326000	326000
Cost of sales	6368000	5991000	6745000
Net Income (Sales - Cost of sales)	32000	-55000	119000

3. reconciliation of Net operating income under variable costing & super variable costing -

	Particulars	Year 1	Year 2	Year 3
	Net opearting income under super variable	32000	-223200	287200
add	reduction in opening stock	0	0	168200
less	reduction in closing stock	0	-168200	0
	Net opearting income undervariable	32000	-55000	119000

Please check with your answer and let me know.