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 Direct labor Variable manufacturing overhead Variable selling and administrative Fixed 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.

Answer 1

1) If the company uses variable costing it considers only variable costs while computing total costs.

a) Unit product cost for two years.

Total cost(variable) ($)

Direct Material	21
Direct Labour	14
Variable Manufacturing overheads	2
Variable Selling and distribution overheads	1
Total	38$/unit

Year 1= 50,000 units * 38$/unit=1,900,000$ Unit product cost

Year 2 =40000 units * 38$/unit=1,520,000$ Unit product cost

Income statement

Particulars	Year1	Year2
Total sales	40000*57=2,280,000	50000*57=2,850,000
Costs	1,900,000	1,520,000
Closing stock	10,000*38=380000	-
Opening stock	-	10,000*38=380000
Profit/(loss)	2,280,000+380,000-1,900,000=760,000$	2,850,000-1,520,000-380,000=950,000$

2) Based on absorption costing is computing costs considering fixed costs as well

Variable costs ($)

Direct Material	21
Direct Labour	14
Variable Manufacturing overheads	2
Variable Selling and distribution overheads	1
Total	38$/unit

Fixed costs Total=

Fixed manufacturing overheads=320000$

Fixed selling and admin overhead=90000$

Total=410,000$

Year 1 Total costs=

Variable costs=50000 units*38=1,900,000

Fixed costs =410.000(per unit =410,000/50000=8.2$/unit)

Total= 2,310.000$ of 50000 units

Year 2 Total costs=

Variable costs=40000 units*38=1,520,000

Fixed costs =410,000

Total= 1,930,000$ of 40000 units

Income statement

Particulars	Year1	Year2
Total sales	40000*57=2,280,000	50000*57=2,850,000
Variable Costs	1,900,000	1,520,000
Closing stock	10,000* 46.2 (38+8.2)=462,000	-
Opening stock	-	10,000* 48.25 (38+10.25)=482,500
Fixed costs	410,000	410,000
Profit/(loss)	2,280,000+462,000-1,900,000-410,000=432,000$	2,850,000-1,520,000-482,500-410,000=437,500$

Reconciliation of net profits of first year by both the methods

Profit as per variable costing method=760,000

Less Fixed overheads not considered=410,000

Add under valuation of closing stock=82,000

(462,000-380,000)

Total net profit as per absorption costing=$432,000