Question

Case 6-29 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2]

[The following information applies to the questions displayed below.]

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	$	27
Direct labor	$	15
Variable manufacturing overhead	$	4
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	580,000
Fixed selling and administrative expenses	$	110,000

During its first year of operations, O’Brien produced 91,000 units and sold 79,000 units. During its second year of operations, it produced 84,000 units and sold 91,000 units. In its third year, O’Brien produced 83,000 units and sold 78,000 units. The selling price of the company’s product is $78 per unit.

Case 6-29 Part-3

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

	Year 1	Year 2	Year 3
Direct materials	$27	$27	$27
Direct labor	15	15	15
Variable manufacturing overhead	4	4	4
Fixed manufacturing overhead	6.37	6.90	6.99
	(580000/91000)	(580000/84000)	(580000/83000)
unit product cost	$52.37	$52.90	$52.99
	Absorption costing Income statement
	Year 1	Year 2	Year 3
Sales	6162000	7098000	6084000
	(79000*78)	(91000*78)	(78000*78)
Less: cost of good sold	4137230	4807540	4132770
Gross margin	2024770	2290460	1951230
Less: selling and administrative expenses	347000	383000	344000
	(3*79000)+110000	(3*91000)+110000	(3*78000)+110000
Net operating income	1677770	1907460	1607230
working:
Cost of good sold
Year 1	4137230
(52.37*79000)
Year 2	4807540
((91000-79000)*52.37)+(79000*52.9)
Year 3	4132770
((84000-79000)*52.9)+(73000*52.99)
If any doubt please comment