Question

Required information

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

Inner Secret T Shirt Company produces 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	$	14
Variable manufacturing overhead	$	6
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	550,000
Fixed selling and administrative expenses	$	160,000

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 81,000 units and sold 88,000 units. In its third year, O’Brien produced 88,000 units and sold 83,000 units. The selling price of the company’s product is $74 per unit.

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.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

Answer 1

Construct The Absorption Costing Unit Product Cost
				Year 1	Year 2	Year 3
Direct Material				30	30	30
Direct labour				14	14	14
Variable Manufacturing overheads				6	6	6
Fixed Manufacturing overheads				6.04	6.79	6.25
				(550000/91000)	(550000/81000)	(550000/88000)
Absorption costing unit prroduct cost				56.04	56.79	56.25
Construct the Absorption Costing Income Statement Under FIFO
				Year 1	Year 2	Year 3
Sales				$5,846,000	$6,512,000	6142000
Cost of Goods sold				4427160	4992270	4668750
				(79000*56.04)	(81000*56.79+7000*56.04)	(83000*56.25)
Gross Margin				$1,418,840	$1,519,730	1473250
Selling and distribution expense				476,000	512,000	492000
Net operating income				942,840	1,007,730	981250