Question

Exercise 4-9 (Algo) Variable and Absorption Costing Unit Product Costs and Income Statements [LO4-1, LO4-2, LO4-3] 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 $ 11 Variable manufacturing overhead $ 5 Variable selling and administrative $ 4 Fixed costs per year: Fixed manufacturing overhead $ 320,000 Fixed selling and administrative expenses $ 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 $52 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

Variable Costing

Direct Material	$                23.00
Direct Labor	$                11.00
Variable Manufacturing Overhead	$                  5.00
Total Unit Product Cost	$                39.00

	Year 1		Year 2
Sales Revenue		$   20,80,000.00		$       26,00,000.00
Variable Cost of Goods Sold
Beginning Inventory	$                       -		$       3,90,000.00
Direct Materials	$   11,50,000.00		$       9,20,000.00
Direct Labor	$     5,50,000.00		$       4,40,000.00
Variable Manufacturing Overhead	$     2,50,000.00		$       2,00,000.00
Total Cost of Goods Available	$   19,50,000.00		$     19,50,000.00
Less : Ending Inventory (10000 units)	$     3,90,000.00		$                         -
Variable Cost of Goods Sold		$   15,60,000.00		$       19,50,000.00
Gross Contribution Margin		$     5,20,000.00		$          6,50,000.00
Variable Selling Expenses		$     1,60,000.00		$          2,00,000.00
Contribution Margin		$     3,60,000.00		$          4,50,000.00
Fixed Costs
Manufacturing Overhead	$     3,20,000.00		$       3,20,000.00
Selling and Administrative Expenses	$        90,000.00		$          90,000.00
Total Fixed Costs		$     4,10,000.00		$          4,10,000.00
Operating Income / (Loss)		$       -50,000.00		$             40,000.00

Absorption Costing

	Year 1	Year 2
Direct Material	$                23.00	$                23.00
Direct Labor	$                11.00	$                11.00
Variable Manufacturing Overhead	$                  5.00	$                   5.00
Fixed Manufacturing Overhead	$                  6.40	$                   8.00
Total Product Cost	$                45.40	$                47.00

	Year 1		Year 2
Sales Revenue		$   20,80,000.00		$       26,00,000.00
Cost of Goods Sold
Beginning Inventory	$                       -		$       4,54,000.00
Direct Materials	$   11,50,000.00		$       9,20,000.00
Direct Labor	$     5,50,000.00		$       4,40,000.00
Variable Manufacturing Overhead	$     2,50,000.00		$       2,00,000.00
Fixed Manufacturing Overhead	$     3,20,000.00		$       3,20,000.00
Total Cost of Goods Available	$   22,70,000.00		$     23,34,000.00
Less : Ending Inventory (10000 units)	$     4,54,000.00		$                         -
Cost of Goods Sold		$   18,16,000.00		$       23,34,000.00
Gross Profit		$     2,64,000.00		$          2,66,000.00
Fixed Selling and Administrative Expenses	$        90,000.00		$          90,000.00
Variable Selling and Administrative Expenses	$     1,60,000.00		$       2,00,000.00
Total Fixed Costs		$     2,50,000.00		$          2,90,000.00
Operating Income / (Loss)		$         14,000.00		$           -24,000.00

Reconciliation
	Year 1	Year 2
Income As per Variable Costing	$       -50,000.00	$         40,000.00
Fixed Costs carried forward for inventory	$        64,000.00
Fixed Costs brought forward for inventory		$       -64,000.00
Income as per absorption costing	$        14,000.00	$       -24,000.00