Question

O'Brien Company namufactures and sells one product.The following information pertains to each of the company's first three years of operations.

Variable cost per unit:                                          

Manufacturing:                                                      

Direct materials                                                  $26

Direct labor                                                         $17

Variable manufacturing overhead                       $4

Variable selling & administrative                        $2

Fixed costs per year:

Fixed manufacturing overhead                        $540,000

Fixed sellingn & administrative expense          $160,000

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 82,000 units and sold 95,000 units. In its third year, O'Brien produced 86,000 units and sold 81,000 units. The selling price of the companys products is $77 per unit.

1. Required:

1. Assume the company uses variable costiong and FIFO inventory flow assumption (FIFO means first-in first-out. In other words, if assumes that the oldest units in inverntory are sold first):

a. Compute the unit product cost for Year 1, Year 2 and Year 3

Year 1..............................Unit Product Cost............................

Year 2..............................Unit Product Cost...........................

Year 3..............................Unit Product Cost...........................

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

                                                                                                       O'Brien Company

                                                                                              Variable Costing Income Statement

                                                                                                            Year 1                Year 2           Year 3

Variable expenses                                                                                                                                                          

Total variable expenses

Fixed expenses:

Total fixed expenses

2. Assume the company uses variable costing and 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 porduct cost for Year 1, Year 2, and Year 3

Year 1..............................Unit Product Cost.......................

Year 2..............................Unit Product Cost.......................

Year 3..............................Unit Product Cost.......................

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

                                                                                                           O'Brien Company

                                                                                              Variable Costing Income Statement

                                                                                                 Year 1                Year 2              Year 3

                                                                                                                                                                                                               

Variable expenses

Total variable expenses

Fixed expenses:

Total fixed expenses

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

Year 1......................................Unit Product Cost................................

Year 2......................................Unit Product Cost................................

Year 3......................................Unit Product Cost..............................

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

                                                            O'Brien Company

                                                       Absorption Costing Income Statement

                                                                                                   Year 1                                    Year 2                                    Year 3

4. Assume the company uses absorption costing and a LIFO inventory flow assumptions (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.)

Year1....................................Unit Product Cost........................

Year 2..................................Unit Product Cost...........................

Year 3..................................Unit Product Cost..........................

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

                                                                       O'Brien Company

                                                              Absorption Costing Income Statement

                                                                                    Year 1          Year 2        Year 3                

Answer 1

		O' Brien
		Unit Product Cost & Sold
		Year 1	Year 2	Year 3
	Beginning Inventory		18000	5000
	Production	96000	82000	86000
	Sales	78000	95000	81000
	Ending Inventory	18000	5000	10000
		Year 1	Year 2	Year 3
	Direct Material	$                             26.00	$                              26.00	$                26.00
	Direct Labor	$                             17.00	$                              17.00	$                17.00
	Variable Manufacturing Overhead	$                               4.00	$                                 4.00	$                   4.00
	Unit Product Cost	$                             47.00	$                              47.00	$                47.00
	Income Statement under Variable Costing
		Year 1	Year 2	Year 3
	Sales=(78000*$77) in year 1,(95000*$77) in year 2,(81000 *$77) in year 3	$              6,006,000.00	$                7,315,000.00	$ 6,237,000.00
	Variable Expenses
	Variable Cost of goods sold(78000*$47) in year 1,(95000*$47) in year 2,(81000*$47) in year 3	$              3,666,000.00	$                4,465,000.00	$ 3,807,000.00
	Variable Selling & Administerative expenses=($78000*$2) in year 1,(95000*$2) in year 2 and (81000*$2) in year 3	$                  156,000.00	$                    190,000.00	$      162,000.00
	Cotribution Margin	$              2,184,000.00	$                2,660,000.00	$ 2,268,000.00
	Fixed Expenses
	Fixed Manufacturing Expenses	$                  540,000.00	$                    540,000.00	$      540,000.00
	Fixed Selling & Administerative Expenses	$                  160,000.00	$                    160,000.00	$      160,000.00
	Net Operating Profit	$              1,484,000.00	$                1,960,000.00	$ 1,568,000.00
		Unit Product Cost under absorption costing
		Year 1	Year 2	Year 3
	Direct Material	$                             26.00	$                              26.00	$                26.00
	Direct Labor	$                             17.00	$                              17.00	$                17.00
	Variable Manufacturing Overhead	$                               4.00	$                                 4.00	$                   4.00
	Fixed Manufacturing Overhead=($540000/96000 Units) in year 1,($540000/82000) in year 2,($540000/86000) in year 3	$                               5.63	$                                 6.59	$                   6.28
	Unit Product Cost	$                             52.63	$                              53.59	$                53.28
	Income Statement under Absorption costing
	Year	Year 1	Year 2	Year 3
	Sales=(78000*$77) in year 1,(95000*$77) in year 2,(81000 *$77) in year 3	$              6,006,000.00	$                7,315,000.00	$ 6,237,000.00
	Cost of goods sold(78000*52.63) in year 1,(18000*52.63)+(77000*53.59) in year 2,(5000*$53.59) +(76000*$53.28) in year 3	$              4,104,750.00	$                5,073,323.17	$ 4,317,136.13
	Gross Margin	$              1,901,250.00	$                2,241,676.83	$ 1,919,863.87
	Less: Selling & Administerative Expenses=($2*78000+160000) in year 1, ($2*95000+$160000) in year 2, ($2*81000+$160000) in year 3	$                  316,000.00	$                    350,000.00	$      322,000.00
	Net Operating Income	$              1,585,250.00	$                1,891,676.83	$ 1,597,863.87
	Reconciliation
	Year	Year 1	Year 2	Year 3
	Net Income under Variable Costing	$              1,484,000.00	$                1,960,000.00	$ 1,568,000.00
	Add: Fixed Manufacturing Overhead Cost in Inventory of Year 1 = (Stock * Fixed Manufacturing Cost)=18000*5.63	$                  101,250.00	$                 (101,250.00)
	Add: Fixed Manufacturing Overhead Cost in Inventory of Year 2 = (Stock * Fixed Manufacturing Cost)=5000*6.59		$                      32,926.83	$      (32,926.83)
	Add: Fixed Manufacturing Overhead Cost in Inventory of Year 3 = (Stock * Fixed Manufacturing Cost)=10000*6.28			$        62,790.70
	Net Income underAbsorption Costing	$              1,585,250.00	$                1,891,676.83	$ 1,597,863.87