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	$	30
Fixed costs per year:
Direct labor	$	1,702,000
Fixed manufacturing overhead	$	836,000
Fixed selling and administrative expenses	$	290,000

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 74,000 units and sold 74,000 units. During its second year of operations, it produced 74,000 units and sold 69,400 units. In its third year, Ogilvy produced 74,000 units and sold 78,600 units. The selling price of the company’s product is $69 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 $23 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

Under super costing, Only direct variable costs are included in product cost

All other indirect cost are charged to expense in the year in which it is incurred Ogilvy- product cost under super costing Year 1 Year 2 Year 3 Production           74,000           74,000           74,000 Material cost                 30                 30                 30 Unit product cost                 30                 30                 30

Ogilvy- Income statement under product costing
Under super costing	Year 1	Year 2	Year 3
Sales (@ 69 per unit)	5,106,000	4,788,600	5,423,400
Variable Material cost of units sold (@ 30 per unit)	2,220,000	2,082,000	2,358,000
Contribution	2,886,000	2,706,600	3,065,400

Ogilvy- product cost under variable costing
	Year 1	Year 2	Year 3
Production	74,000	74,000	74,000
Direct materials	30	30	30
Direct labour	23	23	23
Unit product cost	53	53	53

Under variable costing	Year 1	Year 2	Year 3
Sales (@ 69 per unit)	5,106,000	4,788,600	5,423,400
Variable cost of units sold (@ 53 per unit)	3,922,000	3,678,200	4,165,800
Contribution	1,184,000	1,110,400	1,257,600
Fixed expenses
Manufacturing O/h	836,000	836,000	836,000
S&D O/h	290,000	290,000	290,000
Net operating income	58,000	-     15,600	131,600

The difference in net operating income under the two approach is due to the absorption of labour cost as variable cost based on units sold. Labor cost abosorbed under each year Year 1 Year 1 Year 1 Under super costing       1,702,000       1,702,000       1,702,000 Under variable costing (Units sold @ 23 per unit)       1,702,000       1,596,200       1,807,800 Difference                  -           105,800 -       105,800 Difference in operating income as illustrated under super costing and variable costing                  -   -       105,800         105,800