Question

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	$	30
Direct labor	$	16
Variable manufacturing overhead	$	4
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	550,000
Fixed selling and administrative expenses	$	140,000

During its first year of operations, O’Brien produced 97,000 units and sold 70,000 units. During its second year of operations, it produced 80,000 units and sold 102,000 units. In its third year, O’Brien produced 86,000 units and sold 81,000 units. The selling price of the company’s product is $79 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

Solution 3:

Computation of Unit Product Cost - Absorption Costing
Particulars	Year 1	Year 2	Year 3
Unit Product Cost:
Direct material	$30.00	$30.00	$30.00
Direct Labor	$16.00	$16.00	$16.00
Variable manufacturing overhead	$4.00	$4.00	$4.00
Fixed manufacturing overhead (Fixed manufacturing overhead / Nos of unit produced)	$5.67	$6.88	$6.40
Unit Product Cost	$55.67	$56.88	$56.40

Income Statement - Absorption Cosing
Particulars	Year 1		Year 2		Year 3
	Details	Amount	Details	Amount	Details	Amount
Sales		$5,530,000		$8,058,000		$6,399,000
Cost of Goods Sold:
Cost of goods produced	$5,400,000		$4,550,000		$4,850,000
Add: Opening Inventory	$0		$1,503,093		$284,375
Less: Ending Inventory	$1,503,093	$3,896,907	$284,375	$5,768,718	$563,953	$4,570,422
Gross Profit		$1,633,093		$2,289,282		$1,828,578
Variable Selling & Administrative Expenses		$140,000		$204,000		$162,000
Fixed Selling & Administrative Expenses		$140,000		$140,000		$140,000
Net Operating Income		$1,353,093		$1,945,282		$1,526,578