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 $ $ $ 21 14 5 4 $240,000 $ 70,000 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 $53 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. Req 1A Req 1B Req 2A Req 2B 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

Answer 1

1. (a) Computation of unit product cost for year 1 and year 2 assume the company uses variable costing -

х Produced units year 1 50000 40000 year 2 1050000 840000 700000 560000 250000 200000 2000000 1600000 40 40 a Direct materials @ $ 21/unit b Direct labor @ $ 14/unit c variable manufacturing overhead @ $5/unit d Manufacturing cost (a+b+c) Manufacturing cost per unit (d/x) с e

1. (b) Preparation of income statement for Year 1 & Year 2

Waish Company income statement year 1 year 2 Remarks a Sales (40000*$53),(50000*$53) 2120000 2650000 240000 Cost of goods sold: manufacturing cost (as per above calculation) 2000000 1600000 based on produced units fixed manufacturing overhead 240000 fixed Total manufacturing cost 2240000 1840000 add opening stock (10000 units @$ 40) 400000 based on variable costing less closing stock (1000 units @ $40) 400000 O based on variable costing b Cost of goods sold: 1840000 2240000 0 Gross margin (a-b) 280000 410000 less Selling & administrative overheads-variable less Selling & administrative overheads-fixed 160000 70000 200000 selling & admin. Expenses are based on sold units 70000 Net operating income 50000 140000

2. (a) Computation of unit product cost for year 1 and year 2 assume the company uses absorptioncosting -

Produced units a а b с d Direct materials @ $ 21/unit Direct labor @ $ 14/unit variable manufacturing overhead @ $5/unit Fixed manufacturing overhead Manufacturing cost (a+b+c) Manufacturing cost per unit (d/x) 50000 40000 year 1 year 2 1050000 840000 700000 560000 250000 200000 240000 240000 2240000 1840000 44.8 46 d e

2. (b) Preparation of income statement for Year 1 & Year 2

Waish Company income statement year 1 year 2 Remarks a Sales (40000*$53),(50000*$53) 2120000 2650000 2240000 Cost of goods sold: manufacturing cost add opening stock (10000 units @$ 40) less closing stock (1000 units @ $40) b Cost of goods sold: 0 1840000 based on produced units (absorption costing) 448000 based on variable costing O based on variable costing 2288000 448000 1792000 Gross margin (a-b) 328000 362000 less Selling & administrative overheads-variable less Selling & administrative overheads-fixed 160000 70000 200000 selling & admin. Expenses are based on sold units 70000 Net operating income 98000 92000

3. Reconcile the difference between variable costing and absorption costing net operating income in Year 1 -

year 1 50000 48000 Variable costing net operating income /(loss) add difference in closing stock less difference in opening stock Absorption costing net operating income /(loss) 98000

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