Case 4-29

Answer each question as if you were the managerial accountant for the company and are presenting to the company vice-president regarding the information requested in the case study. You must not only give the correct numbers but also explain to management what variable costing is, why variable costing is useful and why the net income is different for absorption vs variable costing and also why net income is different for LIFO vs FIFO. Then follow the explanation up with a recommendation for management reporting.

For each answer explain the terminology and concepts used. For example, rather than just give the product costet income, explain the calculation - this is a professional report from a managerial accountant to the company vice-president.

Required Info:

Explanation

1. a.

Under variable costing, only the variable manufacturing costs are included in product costs.

	Year 1		Year 2		Year 3
Direct materials	$	30	$	30	$	30
Direct labor		14		14		14
Variable manufacturing overhead		5		5		5
Variable costing unit product cost	$	49	$	49	$	49

b.

Year 1:

Variable cost of goods sold (77,000 units $49 per unit) = $3,773,000

Variable selling and administrative expenses (77,000 units $3 per unit) = $231,000

Year 2:

Variable cost of goods sold (89,000 units $49 per unit) = $4,361,000

Variable selling and administrative expenses (89,000 units $3 per unit) = $267,000

Year 3:

Variable cost of goods sold (75,000 units $49 per unit) = $3,675,000

Variable selling and administrative expenses (75,000 units $3 per unit) = $225,000

Required information (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 Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expenses $ $ $ $ 30 14 5 3 $510,000 $ 180,000 During its first year of operations, O'Brien produced 90,000 units and sold 77,000 units. During its second year of operations, it produced 81,000 units and sold 89,000 units. In its third year, O'Brien produced 80,000 units and sold 75,000 units. The selling price of the company's product is $79 per unit. Required: 1. Assume the company uses variable 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. d 2. Assume the company uses variable 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. Complete this question by entering your answers in the tabs below. Reg 2A Req 2B Compute the unit product cost for Year 1, Year 2, and Year 3. Unit Product Cost $ Year 1 Year 2 Year 3 49 49 $ $ 49 Prepare an income statement for Year 1, Year 2, and Year 3. O'Brien Company Variable Costing Income Statement Year 1 Year 2 $ Sales $ 6,083,000 7,031,000 Variable expenses: Variable cost of goods sold 3,773,000 4,361,000 Variable selling and 231,000 administrative 267,000 Year 3 $ 5,925,000 3,675,000 225,000 4,004,000 2,079,000 4,628,000 2,403,000 3,900,000 2,025,000 Total variable expenses Contribution margin Fixed expenses Fixed manufacturing overhead Fixed selling and administrative 510,000 180,000 510,000 180,000 510,000 180,000 Total fixed expenses 690,000 690,000 690,000 $ 1,713,000 Net operating income $ 1,335,000 1,389,000 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. Complete this question by entering your answers in the tabs below. Req 3A Req 3B Compute the unit product cost for Year 1, Year 2, and Year 3. (Round your intermediate calculations and final answers to 2 decimal places.) Year 1 Year 2 Year 3 Unit Product Cost $ 54.67 $ 55.30 $ 55.38 Reg 3A Req 3B > Complete this question by entering your answers in the tabs below. Req Reg 3B Prepare an income statement for Year 1, Year 2, and Year 3. (Round your intermediate calculations to 2 decimal places.) O'Brien Company Absorption Costing Income Statement Year 1 Year 2 Year 3 $ $ Sales $ 6,083,000 7,031,00 5,925,000 Cost of goods sold 4,209,590 4,913,510 4,153,100 Gross margin 1,873,410 2,117,490 1,771,900 Selling and administrative expenses 411,000 447,000 405,000 $ $ Net operating income $ 1,462,410 1,670,490 1,366,900 Reg 4A Req 4B Prepare an income statement for Year 1, Year 2, and Year 3. (Round your intermediate calculations to 2 decimal places.) O'Brien Company Absorption Costing Income Statement Year 1 Year 2 Sales $ $ 6,083,000 7,031,000 Cost of goods sold 4,209,590 4,916,660 Gross margin 1,873,410 2,114,340 Selling and administrative $ 411,000 $ 447,000 expenses $ Net operating income $ 1,462,410 1,667,340 Year 3 $ 5,925,000 4,153,500 1,771,500 $ 405,000 $ 1,366,500