Question

owing information pertains to each of the company's first two years of operations: Variable costs per unit: Manufacturing: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Pixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expenses $320,000 $ 90.000 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 $57 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. Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 2A Req 2B Req 3 Assume the company uses variable costing. Compute the unit product cost for year 1 and year 2. Year 1 Year 2 Unit product cost

Answer 1

Answer 1-a.

Year 1:

Unit Product Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Unit Product Cost = $21 + $14 + $2
Unit Product Cost = $37.00

Year 2:

Unit Product Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Unit Product Cost = $21 + $14 + $2
Unit Product Cost = $37.00

Answer 1-b.

Year 2 2,850,000 Walsh Company Variable Costing Income Statement Year 1 Sales $ 2,280,000 $ Variable Expenses: Variable Cost of Goods Sold $ 1,480,000 $ Variable Selling and Administrative Expenses $ 40,000 $ Total Variable Expenses $ 1,520,000 $ Contribution Margin 760,000 $ Fixed Expenses: Fixed Manufacturing Overhead 320,000 $ Fixed Selling and Administrative Expenses 90,000 $ Total Fixed Expenses 410,000 $ Net Operating Income 350,000 $ 1,850,000 50,000 1,900,000 950,000 320,000 90,000 410,000 540,000

Year 1:

Sales = 40,000 * $57.00
Sales = $2,280,000

Variable cost of goods sold = 40,000 * $37.00
Variable cost of goods sold = $1,480,000

Variable selling and administrative expenses = 40,000 * $1.00
Variable selling and administrative expenses = $40,000

Year 2:

Sales = 50,000 * $57.00
Sales = $2,850,000

Variable cost of goods sold = 50,000 * $37.00
Variable cost of goods sold = $1,850,000

Variable selling and administrative expenses = 50,000 * $1.00
Variable selling and administrative expenses = $50,000

Answer 2-a.

Year 1:

Unit Product Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead
Unit Product Cost = $21 + $14 + $2 + $320,000/50,000
Unit Product Cost = $43.40

Year 2:

Unit Product Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead
Unit Product Cost = $21 + $14 + $2 + $320,000/40,000
Unit Product Cost = $45.00

Answer 2-b.

Walsh Company Absorption Costing Income Statement Year 1 Sales $ 2,280,000 $ Cost of Goods Sold $ 1,736,000 $ Gross Profit 544,000 $ Selling and Administrative Expenses 130,000 $ Net Operating Income 414,000 $ Year 2 2,850,000 2,234,000 616,000 140,000 476,000

Year 1:

Sales = 40,000 * $57.00
Sales = $2,280,000

Cost of goods sold = 40,000 * $43.40
Cost of goods sold = $1,736,000

Selling and administrative expenses = 40,000 * $1.00 + $90,000
Selling and administrative expenses = $130,000

Year 2:

Sales = 50,000 * $57.00
Sales = $2,850,000

Cost of goods sold = 10,000 * $43.40 + 40,000 * $45.00
Cost of goods sold = $2,234,000

Selling and administrative expenses = 50,000 * $1.00 + $90,000
Selling and administrative expenses = $140,000

Answer 3.

Reconciliation of Variable Costing and Absorption Costing Net Operating Income Year 1 Year 2 Variable Costing Net Operating Income $ 350,000 $ 540,000 Add: Fixed Manufacturing over head deferred $ 64,000 Deduct: Fixed Manufacturing overhead released $ 64,000 Absorption Costing Net Operating Income $ 414,000 $ 476,000