Question

Exercise 6-9 (Static) Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2, LO6-3]

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	$	25
Direct labor	$	15
Variable manufacturing overhead	$	5
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	250,000
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 $60 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 25 25 Direct Labour 15 15 Variable Manufacturing Overhead 5 5 45 45 Units Product Cost Under Variable Costing Year 1 Year 2 Unit Product Cost 45.00 45.00 Income Statement Under Variable Costing Year 1 Year 2 Sales @60 2400000 3000000 Variable Expense Variable Cost of Goods Sold (@45) Variable Selling and Administrative Expense (@2) Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads Fixed Sellingand Administrative Expenses Total fixed Expenses Net Operating Income 1800000 2250000 80000 100000 2350000 1880000 520000 650000 250000 250000 80000 80000 330000 330000 320000 190000

Assume the Absorption costing Calculation of Unit cost Under Absorption Costing Year 2 Year 1 Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head 250000/50000, 250000/40000 Units Product Cost 25 25 15 15 5 5 5.00 6.25 50.00 51.25 Units Product Cost Under absorption Costing Year 1 Year 2 Unit Product Cost 50.00 51.25 1.b Income Statement Under Absorption Costing Year 1 Year 2 Sales @60 Cost of Goods Sold Gross Margin 2400000 3000000 2550000 2000000 450000 400000 Selling and Administrative Overheads ( Varaible +Fixed) 160000 180000 Net Operating Income 240000 270000

Note For Any Further Clarification Plases Use the Comment Box.Thank You Very much