Question

Saved 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 $ 240,000 $ 60,000 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 $85 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. Reg 1A Reg 1B U REG2A Reg 28 Req3 Assume the company uses variable costing. Compute the unit product cost for year 1 and year 2. Year 1 Year 2 Unit product cost Req 1B >

Answer 1

WALSH COMPANY 1-a) Computation of Product Cost under Variable costing method Particulars Direct Material Direct Labour Variable Manufacturing Overhed Variable Costing Product cost per unit (21+17+4) Year 1 21.0 17.0 4.0 42.0 $ $ $ $ Year 2 21.0 17.0 4.0 42.0 $ Note: Selling and administrative overhead are not a part of the product cost. 1-b) Particulars Income Statement Year 1 Calculation D Amount 40000*85 Year 2 L Amount Amount | Calculation $ 3,400,000 50000*85 Amount $ 4,250,000 40000*42 40000*3 $ $ 1,680,000 120,000 50000*42 50000*3 $ $ 2,100,000 150,000 Sales [A] Less: Variable Expenses Product Cost @ 42 [B] Variable Selling and Administrative Expenses (C) Total Variable Expenses [D = B+C] Contribution Margin [E = A-D] Less: Fixed Expenses Fixed Manufacturing Overhead Fixed Selling and Administrative Exp [G] Total Fixed Expenses [H = F+G] Net Operating Income [1 = E-H] $ $ 1,800,000 1,600,000 $ 2,250,000 $ 2,000,000 [F] $ $ 240,000 60,000 $ $ 240,000 60,000 $ $ 300,000 1,300,000 $ $ 300,000 1,700,000 2-a) Computation of Product Cost under Absorption costing method Particulars Year 1 Calculation Amount Direct Material et Material [A] Given Direct Labour [B] Given $ Variable Manufacturing Overhed [C] Given $ Fixed Manufacturing Overhed (240000/50000) $ 21.0 Year 2 Calculation Amount Given Given Given (240000/40000) $ 21.0 17.0 4.0 4.8 17.0 4.0 [D] 6.0 Absorption Costing Product cost per unit [E = A+B+C+D] 46.8 48.0 Note: Fixed Manufacturing Overhead per unit = Total Fixed Overhead/Units Produced Note : Selling and administrative overhead are not a part of the product cost. 2-b) Particulars Income Statement Year 1 Calculation Amount 40000*85 Year 2 L Amount Amount Calculation $ 3,400,000 50000*85 Amount $ 4,250,000 Sales [A] 40000*46.8 |(10000*46.8)+(4 $ 1,872,000 0000*48) $ 1,528,000 $ 2,388,000 $ 1,862,000 Less: Cost of Goods Sold (units sold * Product cost as per 2- [B] Gross Margin C = A-B] Less: Selling and Administrative expenses Variable Selling and Administrative Expenses [D] Fixed Selling and Administrative Expenses [E] Total Selling and Administrative Expenses [ F = D+E] Net Operating Income [G = C-F] 40000*3 50000*3 $ $ 120,000 60,000 $ $ 150,000 60,000 $ $ 180,000 1,348,000 $ $ 210,000 1,652,000 3 Reconciliation of the difference between income as per variable costing and as per absorption costing during year 1 Year 1 Year 2 Calculation Amount Calculation Amount Variable Costing Net Operating Incoem $ 1,300,000 $ 1,700,000 Add: Fixed Mfd Overhead deferred in ending Inventory (10000*4.8) $ 48,000 Less: Fixed Mfd Overhead released in ending Inventory (10000*4.8) $ 48,000 Absorption Costing Net Operating Income $ 1,348,000 $ 1,652,000 In the variable costing method, fixed manufacturing overhead are accounted for the period when they are incurred. In the absorption costing method, the fixed manufacturing overhead are accounted when corresponding products are sold. This created deferral of expenses/income and resulting in difference in income under the two method. Note