Question

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	$	17
Variable manufacturing overhead	$	5
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	580,000
Fixed selling and administrative expenses	$	190,000

During its first year of operations, O’Brien produced 91,000 units and sold 71,000 units. During its second year of operations, it produced 76,000 units and sold 91,000 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.

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

Construct The Absorption Costing Unit Product Cost
				Year 1	Year 2	Year 3
Direct Material				27	27	27
Direct labour				17	17	17
Variable Manufacturing overheads				5	5	5
Fixed Manufacturing overheads				6.37	7.63	7.07
Absorption costing unit prroduct cost				55.37	56.63	56.07
Construct the Absorption Costing Income Statement Under FIFO
				Year 1	Year 2	Year 3
Sales				$5,467,000	$7,007,000	5929000
Cost of Goods sold				3931270	5128130	4320190
Gross Margin				$1,535,730	$1,878,870	1608810
Selling and distribution expense				403,000	463,000	421000
Net operating income				1,132,730	1,415,870	1187810
Cost of goods sold:
Year 1 (71000 units @ 55.37):				3,931,270
Year2 (20000*55.37+71000*56.63):				5,128,130
Year3 (5000*56.63+72000*56.07):				4,320,190