O’Brien Company manufactures and sells one product. The following information pe
ID: 2547399 • Letter: O
Question
O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:
During its first year of operations, O’Brien produced 96,000 units and sold 76,000 units. During its second year of operations, it produced 79,000 units and sold 94,000 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 $77 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.
Variable costs per unit: Manufacturing: Direct materials $ 30 Direct labor $ 17 Variable manufacturing overhead $ 5 Variable selling and administrative $ 1 Fixed costs per year: Fixed manufacturing overhead $ 590,000 Fixed selling and administrative expenses $ 180,000Explanation / Answer
O' Brien Unit Product Cost & Sold Year 1 Year 2 Year 3 Beginning Inventory 20000 5000 Production 96000 79000 82000 Sales 76000 94000 77000 Ending Inventory 20000 5000 10000 Year 1 Year 2 Year 3 Direct Material $ 30.00 $ 30.00 $ 30.00 Direct Labor $ 17.00 $ 17.00 $ 17.00 Variable Manufacturing Overhead $ 5.00 $ 5.00 $ 5.00 Unit Product Cost $ 52.00 $ 52.00 $ 52.00 Income Statement under Variable Costing Year 1 Year 2 Year 3 Sales=(76000*$77) in year 1,(94000*$77) in year 2,(77000 *$77) in year 3 $ 5,852,000.00 $ 7,238,000.00 $ 5,929,000.00 Variable Expenses Variable Cost of goods sold(76000*$52) in year 1,(94000*$52) in year 2,(77000*$52) in year 3 $ 3,952,000.00 $ 4,888,000.00 $ 4,004,000.00 Variable Selling & Administerative expenses=($76000*$1) in year 1,(94000*$1) in year 2 and (77000*$1) in year 3 $ 76,000.00 $ 94,000.00 $ 77,000.00 Cotribution Margin $ 1,824,000.00 $ 2,256,000.00 $ 1,848,000.00 Fixed Expenses Fixed Manufacturing Expenses $ 590,000.00 $ 590,000.00 $ 590,000.00 Fixed Selling & Administerative Expenses $ 180,000.00 $ 180,000.00 $ 180,000.00 Net Operating Profit $ 1,054,000.00 $ 1,486,000.00 $ 1,078,000.00 Unit Product Cost under absorption costing Year 1 Year 2 Year 3 Direct Material $ 30.00 $ 30.00 $ 30.00 Direct Labor $ 17.00 $ 17.00 $ 17.00 Variable Manufacturing Overhead $ 5.00 $ 5.00 $ 5.00 Fixed Manufacturing Overhead=($590000/96000 Units) in year 1,($590000/79000) in year 2,($590000/82000) in year 3 $ 6.15 $ 7.47 $ 7.20 Unit Product Cost $ 58.15 $ 59.47 $ 59.20 Income Statement under Absorption costing Year Year 1 Year 2 Year 3 Sales=(76000*$77) in year 1,(94000*$77) in year 2,(77000 *$77) in year 3 $ 5,852,000.00 $ 7,238,000.00 $ 5,929,000.00 Cost of goods sold(76000*58.15) in year 1,(20000*58.15)+(74000*59.47) in year 2,(5000*$59.47) +(72000*$59.20) in year 3 $ 4,419,083.33 $ 5,563,574.89 $ 4,559,390.55 Gross Margin $ 1,432,916.67 $ 1,674,425.11 $ 1,369,609.45 Less: Selling & Administerative Expenses=($1*76000+180000) in year 1, ($1*94000+$180000) in year 2, ($1*77000+$180000) in year 3 $ 256,000.00 $ 274,000.00 $ 257,000.00 Net Operating Income $ 1,176,916.67 $ 1,400,425.11 $ 1,112,609.45 Reconciliation Year Year 1 Year 2 Year 3 Net Income under Variable Costing $ 1,054,000.00 $ 1,486,000.00 $ 1,078,000.00 Add: Fixed Manufacturing Overhead Cost in Inventory of Year 1 = (Stock * Fixed Manufacturing Cost)=20000*6.15 $ 122,916.67 $ (122,916.67) Add: Fixed Manufacturing Overhead Cost in Inventory of Year 2 = (Stock * Fixed Manufacturing Cost)=5000*7.47 $ 37,341.77 $ (37,341.77) Add: Fixed Manufacturing Overhead Cost in Inventory of Year 3 = (Stock * Fixed Manufacturing Cost)=10000*7.2 $ 71,951.22 Net Income underAbsorption Costing $ 1,176,916.67 $ 1,400,425.10 $ 1,112,609.45
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