Question

Walsh Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	23
Direct labor	$	18
Variable manufacturing overhead	$	5
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	240,000
Fixed selling and administrative expenses	$	80,000

During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company’s product is $55 per unit.

Required:

1. Assume the company uses variable costing:

a. Compute the unit product cost for Year 1 and Year 2.

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

2. Assume the company uses absorption costing:

a. Compute the unit product cost for Year 1 and Year 2.

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

3. Reconcile the difference between variable costing and absorption costing net operating income in Year 1.

Answer 1

Year 1 Requirement [1(a)] Unit Product cost under Variable costing : Direct material Direct labour Variable manfacturing Overhead 23.00 18.00 5.00 Year 2 $ 23.00 $ 18.00 $ 5.00 $ $ 46.00 $ 46.00

Requirement [1(b)] Variable costing income statement : Year 1 $ 2,200,000.00 Year 2 $2,750,000.00 Sales Variable expense : Variable cost of goods sold Variable selling and admin Total variable expense Contribution margin Fixed expense : Fixed manf oh Fixed selling and admin Net Operating income $ 1,840,000.00 $ 160,000.00 $ 2,000,000.00 $ 200,000.00 $ 2,300,000.00 $ 200,000.00 $ 2,500,000.00 $ 250,000.00 $ $ $ 240,000.00 $ 80,000.00 $ (120,000.00) $ 240,000.00 80,000.00 (70,000.00)

Year 1 Requirement [2(a)] Unit Product cost under absorption costing : Direct material Direct labour Variable manfacturing Overhead Fixed manfacturing Overhead 5 23.00 18.00 5.00 4.80 Year 2 $ $ $ $ 23.00 18.00 5.00 6.00 सी 50.80 $ 52.00

Requirement (2(b)) Absorption costing income statement : Year 1 $ 2,200,000.00 $ 2,032,000.00 $ 168,000.00 Year 2 $2,750,000.00 $ 2,600,000.00 $ 150,000.00 Sales Less : Cost of goods sold Gross Margin Less: Selling and admin expense Variable selling and admin Fixed selling and admin Net Operating Income $ $ $ (160,000.00) $ (200,000.00) (80,000.00) $ (80,000.00) (72,000.00) $ (130,000.00) Year 1 Year 2 $ 520,000.00 $ 2,080,000.00 $ 2,540,000.00 Note : Cost of goods sold : Beginning Inventory Add: cost of goods manfactured (50000*50.8) (40000*52) Goods available for sale Less : Ending inventory (10000*50.8) Cost of goods sold $ 2,600,000.00 $ $ 2,540,000.00 (508,000.00) $ 2,032,000.00 $ 2,600,000.00

Requirement 3 Reconciliation Year 1 Year 2 Variable costing net operating income $ (120,000.00) $ (70,000.00) Add : Fixed OH manfacturing cost deferred (10000*4.8) $ 48,000.00 Deduct: Fixed OH released from inventory (10000*4.8) $ 60,000.00) Absorption costing Net operating income $ (72,000.00) $(130,000.00)