Question

I posted this question before and the person who answered it answered wrong.........please have someone else try again

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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	$28
Direct labor	$15
Variable manufacturing overhead	$5
Variable selling and administrative	$3
Fixed costs per year:
Fixed manufacturing overhead	$580,000
Fixed selling and administrative expenses	$100,000

During its first year of operations, O’Brien produced 94,000 units and sold 76,000 units. During its second year of operations, it produced 80,000 units and sold 93,000 units. In its third year, O’Brien produced 82,000 units and sold 77,000 units. The selling price of the company’s product is $73 per unit.

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

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

4. Assume the company uses absorption costing and a 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 product cost for Year 1, Year 2, and Year 3. (Round your intermediate calculations and final answers to 2 decimal places.)

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

Answer 1

Note1 : For all the parts of the question, it has been assumed that actual production is equal to planned production and hence there is no overabsorption or under absorption of fixed manufacturing overheads.

Note 2 : Cost of goods produced

Particulars	Year 1	Year 2	Year 3
Direct Material	28	28	28
Direct Labour	15	15	15
Variable manufacturing overhead	5	5	5
Fixed manufacturing overhead (A/B)	6.17	7.25	7.07
Cost of goods produced	54.17	55.25	55.07
Total Fixed manufacturing overhead (A)	580,000	580,000	580,000
Units produced (B)	94,000	80,000	82,000

a) Calculation of unit product cost anf FIFO inventory flow assumption

Particulars	Year 1	Year 2	Year 3
Opening Inventory in units (A)	0	18,000	5,000
Opening inventory in $ (B)	0	975,060	276,250
Production in units (C)	94,000	80,000	82,000
Production in $ (D= C*Unit Cost of production)	5,091,980	4,420,000	4,515,740
Sales in units (E)	76,000	93,000	77,000
Sales in $ (F=E*73))	5,548,000	6,789,000	5,621,000
Closing Stock in units (G=A+C-E)	18,000	5,000	10,000
Closing Stock in $ (H) (See note 3)	975,060	276,250	550,700
Cost of goods sold in $ (I=B+D-H)	4,116,920	5,118,810	4,241,290
Unit Cost of goods sold (J=I/E)	54.17	55.04	55.08

Note 3 : Closing Stock in $

Particulars	Year 1	Year 2	Year 3
Closing Stock in units	18,000	5,000	10,000
Unit Cost of production	54.17	55.25	55.07
Closing Stock in $	975,060	276,250	550,700

Since FIFO method is followed, hence the value per unit of closing stock is equal to unit cost of production of current year.

b) Income Statement

Particulars	Year 1	Year2	Year 3
Revenue (A)	5,548,000	6,789,000	5,621,000
Cost of goods sold (B)	4,116,920	5,118,810	4,241,290
Gross margin (C=A-B)	1,431,080	1,670,190	1,379,710
Variable Selling and administrative cost @ $3 per unit sold	228,000	279,000	231,000
Fixed Selling and administrative cost	100,000	100,000	100,000
Net Income	1,103,080	1,291,190	1,048,710

4 a) Calculation of unit product cost anf LIFO inventory flow assumption

Particulars	Year 1	Year 2	Year 3
Opening Inventory in units (A)	0	18,000	5,000
Opening inventory in $ (B)	0	975,060	270,850
Production in units (C)	94,000	80,000	82,000
Production in $ (D= C*Unit Cost of production)	5,091,980	4,420,000	4,515,740
Sales in units (E)	76,000	93,000	77,000
Sales in $ (F=E*73))	5,548,000	6,789,000	5,621,000
Closing Stock in units (G=A+C-E)	18,000	5,000	10,000
Closing Stock in $ (H) (See note 3)	975,060	270,850	546,200
Cost of goods sold in $ (I=B+D-H)	4,116,920	5,124,210	4,240,390
Unit Cost of goods sold (J=I/E)	54.17	55.10	55.07

Note 3 : Closing Stock in $

Particulars	Year 1	Year 2	Year 3
Closing Stock in units	18,000	5,000	5,000 and 5,000
Unit Cost of production	54.17	54.17	54.17 and 55.07
Closing Stock in $	975,060	270,850	546,200

Since LIFO method is followed, the closing stock is assumed to be left from the previous year(s) and hence the value per unit of closing stock is taken as manufacturing cost of previous year(s).

Since in year 2 all stock manufactured in Year 2 has been sold and hence in Year 3, remaining closing stock of 10,000 belongs to 5,000 of year 1 and 5,000 of year 3

b) Income Statement

Particulars	Year 1	Year2	Year 3
Revenue (A)	5,548,000	6,789,000	5,621,000
Cost of goods sold (B)	4,116,920	5,124,210	4,240,390
Gross margin (C=A-B)	1,431,080	1,664,790	1,380,310
Variable Selling and administrative cost @ $3 per unit sold	228,000	279,000	231,000
Fixed Selling and administrative cost	100,000	100,000	100,000
Net Income	1,103,080	1,285,790	1,049,610