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 0000 0 $ $ 320,000 50,000 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 $54 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 $ 40 $ 40

Answer 1

Direct Materials	23
Direct Labour	11
Variable manufacturing overhead	6
Variable selling and adminstrative	5
Fixed
Manufacturing overhead	320000
Selling and administrative	50000
	First year	Second year
Produced	50000	40000
Sold	40000	50000
Under variable costing product cost includes only a variable portion
	First year	Second year
Unit product cost	23+11+6	23+11+6
Unit product cost	40	40
b.
Particulars	Year1	Year2
Sales	40000*54	50000*54
	2160000	2700000
Variable expenses
Variable cost of goods sold	40000*40	50000*40
	1600000	2000000
Variable selling and administrative	40000*5	50000*5
	200000	250000
Total variable expenses	1800000	2250000
Fixed Expenses
Manufacturing overhead	320000	320000
Selling and administrative	50000	50000
Total fixed expenses	370000	370000
Net operating profit/(loss)	-10000	80000
2
Under absorption costing
The product costs (or cost of goods sold) would include direct materials, direct labor and overhead. The period costs would include selling, general and administrative costs.
	First year	Second year
Unit product cost	23+11+6+5+7.4	23+11+6+5+9.25
Unit product cost	52.4	54.25
Fixed overhead	370000	370000
Production	50000	40000
Fixed overhead per unit	7.4	9.25
Particulars	Year1	Year2
Sales	40000*54	50000*54
	2160000	2700000
Cost of sales
Operating inventory	0	524000
Variable cost	2250000	1800000
Fixed overhead cost	370000	370000
Less:Closing inventory	524000	0
(10000 units)	2096000	2694000
Profit/(loss)	64000	6000
3
	Year1	Year2
Variable costing net operating income(loss)	-10000	80000
Absorption costing net operating income(loss)	64000	6000