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	$	26
Direct labor	$	13
Variable manufacturing overhead	$	7
Variable selling and administrative	$	6
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
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 $52 per unit.

Required:

1. Assume the company uses variable costing:

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

	Year 1 Year 2 Unit product cost $46 $46

b. Prepare an income statement for year 1 and year 2 Walsh Company Income Statement Year 1 Year 2 2,080,000 2,600,000 Sales Variable expenses Variable cost of goods sold Variable selling and administrative - 1,840,000 240,000 2,300.000 300,000 2,080,000 2,600,000 0 - 0 Total variable expenses Contribution margin Fixed expenses Fixed manufacturing overhead Fixed selling and administrative expense 320,000 80,000 320,000 80,000 400.000 400.000 Total fixed expenses Net operating loss (400,000) (400,000) 2. Assume the company uses absorption costing: a. Compute the unit product cost for year 1 and year 2. (Round your answers to 2 decimal places.) 2 decimal places required. Unit products 52.40 $ 54.00 b. Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places) Walsh Company Income Statement Year 1 Year 2 2,080,000 2,096,000 (16,000) 2,600,000 2,684,000 (84,000) Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss) S (16,000) S (84,000) 3. Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2 Year 1 Year 2 Variable costing net operating income (loss) Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing Absorption costing net operating income (loss) $ 0 s

I cannot calculate selling and administrative costs as well as reconcile..... please show calculations

Answer 1

Part 1

Unit Product cost under Variable costing
	Year 1	Year 2
Direct material per unit	$                 26	$                   26
Direct labor per unit	$                 13	$                   13
Variable manufacture overhead per unit	$                   7	$                     7
Unit Product cost under Variable costing	$                 46	$                   46
Walsh Company
Income statement (Variable Costing)
Units sold	40,000	50,000
Sales revenue (Units sold * 52)	$   2,080,000	$     2,600,000
Less: Variable cost
Variable cost of goods sold (Units sold * 46)	$   1,840,000	$     2,300,000
Variable selling and administrative (Units sold * 6)	$      240,000	$        300,000
Total variable cost	$   2,080,000	$     2,600,000
Contribution margin	$                  -	$                    -
Less: fixed cost
Fixed manufacture overhead	$      320,000	$        320,000
Fixed selling and administrative	$         80,000	$           80,000
Total fixed cost	$      400,000	$        400,000
Operating income (loss)	$    (400,000)	$      (400,000)

Part 2

Units cost under absorption costing
	Year 1	Year 2
Fixed manufacture overhead	$            320,000	$            320,000
Divided by: Units produced	50,000	40,000
Fixed manufacture overhead per unit	$                   6.40	$                   8.00
Direct material per unit	$                 26.00	$                26.00
Direct labor per unit	$                 13.00	$                13.00
Variable manufacture overhead per unit	$                   7.00	$                   7.00
Fixed manufacture overhead per unit	$                   6.40	$                   8.00
Units cost under absorption costing	$                 52.40	$                54.00
Units produced	50,000	40,000
Multiply: Variable cost per unit	$                 46.00	$                46.00
Variable manufacture overhead	$        2,300,000	$        1,840,000
Variable manufacture overhead	$        2,300,000	$        1,840,000
Fixed manufacture overhead	$            320,000	$            320,000
Total Manufacturing cost	$        2,620,000	$        2,160,000
	Year 1	Year 2
Beginning inventory	$                         0	$            524,000
Add: Total Manufacturing cost	$        2,620,000	$        2,160,000
Less: ending inventory (52.4*10000)	$          (524,000)	$                      (0)
Cost of goods sold	$        2,096,000	$        2,684,000
Variable selling and administrative	$            240,000	$            300,000
Fixed selling and administrative	$              80,000	$              80,000
Selling and administrative expenses	$            320,000	$            380,000
Walsh Company
Income statement (Absorption Costing)
Sales	$        2,080,000	$        2,600,000
Less: Cost of goods sold	$        2,096,000	$        2,684,000
Contribution margin	$            (16,000)	$            (84,000)
Less: Selling and administrative expenses	$            320,000	$            380,000
Net operating income (loss)	$          (336,000)	$         (464,000)

Part 3

Ending Inventory value in year 1 under both method
Absorption costing (10000*52.4)	$            524,000
Variable costing (10000*46)	$            460,000
Difference	$              64,000
Reconciliation
	Year 1	Year 2
Operating income (loss) under variable costing	$          (400,000)	$         (400,000)
Add: Difference in ending inventory value (Fixed Manufacture overhead cost deferred in inventory value under Absorption costing)	$              64,000
less : Difference in Beginning inventory value (Fixed Manufacture overhead cost realized from inventory value under Absorption costing)		$            (64,000)
Operating income (loss) under Absorption costing	$          (336,000)	$         (464,000)