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	$	21
Direct labor	$	16
Variable manufacturing overhead	$	3
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	240,000
Fixed selling and administrative expenses	$	100,000

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 $58 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.

Req 1A Req 1B Req 2A Req 2B Reg 3 Assume the company uses variable costing. Compute the unit product cost for year 1 and year 2. Year 1 Year 2 Unit product cost

Answer 1

Answer to Question 1-a:

21 Question 1-a Year 1 Direct Materials $ Direct Labor $ Variable Manufacturing Overhead $ Unit Product Cost $ Calculation (21 + 16 + 3) 16 Year 2 21 $ 16 $ 3 $ 40$ (21 + 16 + 3) 3 40 Fixed manufacturing overheads are treated as period cost in marginal costing, hence they are excluded in the calculation of product cost.

Answer to Question 1-b:

Question 1-b Variable Costing Income Statement Year 1 Year 2 Units Sold 40,000 50,000 Sales $ 2,320,000 $ 2,900,000 Calculation (40,000 X $58) (50,000 X $58) Variable expenses: Variable product cost $ 1,600,000 $ 2,000,000 Calculation (40,000 X $40) (50,000 X $40) Variable selling and administrative expenses $ 80,000 $ 100,000 Calculation (40,000 X $2) (50,000 X $2) Total Variable Cost $ 1,680,000 $ 2,100,000 Contribution Margin $ 640,000 $ 800,000 (2,320,000 - Calculation 1,600,000) (2,900,000 - 2,100,000) Fixed expenses: Fixed manufacturing overhead $ 240,000 $ 240,000 Fixed selling and administrative expenses $ 100,000 $ 100,000 Total fixed expenses $ 340,000 $ 340,000 Net operating income $ 300,000 $ 460,000 Calculation (640,000 - 340,000) (800,000 - 340,000)

Answer to Question 2-a:

Question 2-a Year 1 Year 2 Direct Materials $ 21 $ 21 Direct Labor $ 16 $ 16 Variable Manufacturing Overhead $ 3 $ 3 Fixed Manufacturing Overhead $ 4.80$ 6.00 Calculation (240,000/50,000) (240,000/40,000) Unit Product Cost $ 44.80 $ 46.00 Calculation (21 + 16 + 4.80) (21 + 16 + + 3+6.00) Fixed manufacturing overheads are treated as product cost in absorption costing, hence they are included in product cost.

Answer to Question 2-b:

Question 2-b Year 1 Year 2 50,000 40,000 40,000 50,000 $ 2,320,000 $ 2,900,000 (40,000 X $58) (50,000 X $58) Number of units produced Units sold Sales Calculation Cost of goods sold: Beginning inventory Calculation Cost of goods manufactured Calculation Less: Ending Inventory Calculation Cost of goods sold Calculation Gross Margin $ $ 448,000 (10,000 X 44.80) $ 2,240,000 $ 1,840,000 (50,000 X 44.80) (40,000 X 46.00) $ 448,000 $ (10,000 X 44.80) $ 1,792,000 $ 2,288,000 (2,240,000 - 448,000) (448,000 + 1,840,000) $ 528,000 $ 612,000 (2,320,000 - (2,900,000 - 1,792,000) 2,288,000) Calculation Less: Selling and administrative expenses Calculation Net Income Calculation $ 180,000 $ 200,000 (40,000 x $10) + (50,000 x $10) + 100,000 100,000 $ 348,000 $ 412,000 (528,000 - 180,000) (612,000 - 200,000)

Answer to Question 3:

Question 3 Reconciliation of Variable Costing and Absorption Costing Net Operating Income Year 1 Year 2 Variable costing net operating income (loss) $ 300,000 $ 460,000 Add (Deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing $ 48,000 $ (48,000) Calculation (10,000 X $4.80) (10,000 X $4.80) Absorption costing net operating income (loss) $ 348,000 $ 412,000 Calculation (300,000 + 48,000) (460,000 - 48,000) Workings Year 1 Year 2 Units in Beginning Inventory Add: Units Produced Less: Units Sold Units in Ending Inventory 50,000 40,000 10,000 40,000 50,000 10,000