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 cost/net income, explain the calculation - this is a professional report from a managerial accountant to the company vice-president.
Use outside sources when necessary
When giving a recommendation, back it up with numbers. Make sure you address the original dilemma - lowest bid in different situations.
This particular answer should be managerial accounting report to the company president that is no more than 2 pages in length.
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 $ 26
Direct labor $ 14
Variable manufacturing overhead $ 5
Variable selling and administrative $ 1
Fixed costs per year:
Fixed manufacturing overhead $ 540,000
Fixed selling and administrative expenses $ 110,000
During its first year of operations, O’Brien produced 91,000 units and sold 80,000 units. During its second year of operations, it produced 85,000 units and sold 91,000 units. In its third year, O’Brien produced 84,000 units and sold 79,000 units. The selling price of the company’s product is $75 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):
b. Prepare an income statement for Year 1, Year 2, and Year 3.
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.
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.
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.