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 $ $ 27 16 6 5 $ 400.000 $ 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 $51 per unit Required: 1. Assume the company uses variable costing: a. Compute the unit product cost for year 1 and year 2 Year 1 Year 2 Unit product cost b. Prepare an income statement for year 1 and year 2 Walsh Company Income Statement b. Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places) ( Year 1 Year 2 Walsh Company Income Statement Variable expenses Year 1 Year 2 Total variable expenses Fixed expenses Net operating income (loss) Total xed expenses 3. Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2 Year 1 Year 2 2. Assume the company uses absorption costing: a. Compute the unit product cost for year 1 and year 2. (Round your answers to 2 decimal places.) ) Variable costing net operating income (loss) Year 1 Year 2 Unit product cost Absorption costing net operating income (loss)

Answer 1

1a) Calculation of Unit cost Under Variable Costing Year 1 27.00 Year 2 27.00 16.00 Direct Material Direct Labor Variable Manufacturing Overhead Unit Product Cost 16.00 6.00 6.001 49.00 49.00 1b) Income Statement Under Variable Costing Year 1 20400001 Year 2 2550000 Sales Variable Expense: Variable cost of goods sold Variable Selling and Administrative Expense 1960000 200000 2450000 250000 2160000 2700000 -120000 - 150000 Total Varible Expenses Contribution Magin Fixed Expenses : Fixed manufacturing Overheads Fixed Selling and Administrative Expenses 400000 90000 400000 90000 490000 Total fixed Expenses Net Operating Income or loss 490000 -640000 -610000

Year 2 2a) Calculation of Unit cost Under Absorption Costing Year 1 Direct Material 27.00 Direct Labour 16.001 Variable Manufacturing Overhead 6.00 Fixed Manufacturing Over head (400,000/50000), (400,000 / 40000) 8.001 Unit Cost 57.00 27.00 16.00 6.001 10.00 59.00 2b) Income Statement Under Absorption Costing Year 1 Year 2 2040000 2550000 2280000 2930000 Sales Cost of Goods Sold Gross Margin Selling and Administrative Overheads Net Operating Income or loss - 240000 -380000 340000 290000 -530000 -720000

Year 2 -610000 -640000 3) Reconcile the variable costing and absorption costing Net income Year 1 Variable Costing Net Operating Income (loss) Add: Fixed Manufacturing over head cost deferred in inventory under absorption Deduct: F t: Fixed Manufacturing over head cost released from inventory under absorption costing Absorption costing net operating income (Loss) 80000 -80000 -530000 -720000