Question

Chapter 6

Ogilvy Company manufactures and sells one product. The following information pertains to each of the company's first three years of operations: $ 26 Variable cost per unit: Direct materials Fixed costs per year: Direct labor Fixed manufacturing overhead Fixed selling and administrative expenses $1,330,000 $ 832,000 $ 266,000 The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 70,000 units and sold 70,000 units. During its second year of operations, it produced 70,000 units and sold 66,200 units. In its third year, Ogilvy produced 70,000 units and sold 73,800 units. The selling price of the company's product is $61 per unit. Required: 1. Assume the company uses super-variable costing: 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. 2. Assume the company uses a variable costing system that assigns $19 of direct labor cost to each unit produced: 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. 3. Reconcile the difference between the super-variable costing and variable costing net operating incomes in Years 1, 2, and 3.

Part 1A

Part 1B

Part 2A

Part 2B

Part 3

Answer 1

Answer to Question 1A:

Question 1A Super variable costing only considers direct material as variable cost. The remaining are treated as period cost. Unit Particular Cost Year 1 Year 2 Year 3 26 26 26

Answer to Question 1B:

Question 1B Particular Sales Unit Sales Revenue Calculation Less: Variable Cost Direct Material Calculation Contribution Year 1 70,000 $ 4,270,000 (70,000 X $61) Year 2 66,200 $ 4,038,200 66,200 X $61) Year 3 73,800 $ 4,501,800 (73,800 X $61) $ 1,820,000 (70,000 X $26) $ 2,450,000 (4,270,000 - 1,820,000) $ 1,721,200 (66,200 X $26) $ 2,317,000 (4,038,200 - 1,721,200) $ 1,918,800 (73,800 X $26) $ 2,583,000 (4,501,800 - 1,918,800) Calculation $ 1,330,000 $ 1,330,000 $ 1,330,000 Less: Fixed Cost Direct Labor Fixed Manufacturing Overhead $ 832,000 $ 832,000 $ 832,000 Fixed selling and Administrative expense $ 266,000 $ 266,000 $ 266,000 Total Fixed Expenses Net Operating Income/(Loss) $ 2,428,000 $ 2,428,000 $ 2,428,000 22,000 $ (111,000) $ 155,000 (2,450,000 - (2,317,000 - (2,583,000 - 2,428,000) 2,428,000) 2,428,000) Calculation

Answer to Question 2A:

Question 2A Under variable costing, direct material cost and direct labor cost will be considered variable cost. Year 1 Year 2 Year 3 Unit Particular Cost Calculation 45 ($26 + $19) 45 ($26 + $19) 45 ($26 + $19)

Answer to Question 2B:

|Year2 Particular Sales Unit Sales Revenue - Calculation - Less: Variable Cost Direct Material Year 1 70,000 $ 4,270,000 (70,000 X $61) Year 2 66,200 $ 4,038,200 (66,200 X $61) 66,200 Year 3 73,800 $ 4,501,800 (73,800 X $61) 4,50 $ 1,820,000 $ 1,721,200 $ 1,918,800 Calculation (70,000 X $26) (66,200 X $26) |(73,800 x $26) Direct Labor 1,330,000 1,257,800 1,402,200 Calculation (70,000 X $19) (66,200 X $19) (73,800 X $19) Total Variable Cost $ 3,150,000 $ 2,979,000 $ 3,321,000 (1,820,000+ (1,721,200 + (1,918,800 + Calculation 1,330,000) 1,257,800) 1,402,200) Contribution $ 1,120,000 $ 1,059,200 $ 1,180,800 (4,270,000 - (4,038,200 - (4,501,800 - Calculation 3,150,000 2,979,000 3,321,000 Less: Fixed Cost Fixed Manufacturing "5 $ 832,000 $ 832,000$ 832,000 Overhead Fixed selling and Administrative $ 266,000$ 266,000$ 266,000 expense Total Fixed $ 1,098,000 $ 1,098,000 $ 1,098,000 Expenses Net Operating 22,000 $ (38,800) $ 82,800 Income/(Loss) (1,120,000 - (1,059,200 - (1,180,800 - Calculation 1,098,000) 1,098,000) 1,098,000)

Answer to Question 3:

Year 2 Year 3 22,000 $ (111,000)| $ 155,000 Question 3 Particular Year 1 Super-variable costing net operating income $ (loss) Direct labor cost $ deferred in inventory Variable costing net operating income (loss) $ $ 72,200 $ (72,200) 22,000$ (38,800) $ 82,800 (-111,000+ 72,200) Calculation (155,000 - 72,200) Computation of direct labor cost deferred in inventory Year Units Produced 70,000 70,000 Units Sold 66,200 73,800 Opening Unit 3,800 Closing Unit 3,800 Labor cost per unit 19 Labor cost deferred in $ 72,200 $ (72,200) inventory Calculation (3,800 x $19) (3,800 X $19) 19