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 $ $ $ $ 25 18 5 4 $320,000 $ 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 $57 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 Reg 2A Reg 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

(1a)

	Year 1	Year 2
Unit product cost	$               48.00	$               48.00

(1b)

Income Statement
	Year 1	Year 2
Sales	$        2,280,000	$        2,850,000
Variable expenses
Variable cost of goods sold	$        1,920,000	$        2,400,000
Variable selling and administrative	$            160,000	$            200,000
Total variable expenses	$        2,080,000	$        2,600,000
Contribution margin	$            200,000	$            250,000
Fixed expenses
Fixed manufacturing overhead	$            320,000	$            320,000
Fixed selling and administrative expense	$              70,000	$              70,000
Total fixed expenses	$            390,000	$            390,000
Net operating income (loss)	$         (190,000)	$         (140,000)

Explanations :-

	Year 1	Year 2
Direct materials	$                25.00	$                25.00
Direct labor	$                18.00	$                18.00
Variable manufacturing overhead	$                   5.00	$                   5.00
	$                48.00	$                48.00

(2a)

	Year 1	Year 2
Unit product cost	$                54.40	$                56.00

(2b)

Income Statement
	Year 1	Year 2
Sales	$        2,280,000	$        2,850,000
Cost of goods sold	$        2,176,000	$        2,800,000
Gross margin	$            104,000	$              50,000
Selling and administrative expenses	$            230,000	$            270,000
Net operating income (loss)	$         (126,000)	$         (220,000)

Explanations :-

	Year 1	Year 2
Direct materials	$                25.00	$                25.00
Direct labor	$                18.00	$                18.00
Variable manufacturing overhead	$                   5.00	$                   5.00
Fixed manufacturing overhead
($320000/50000)	$                   6.40
($320000/40000)		$                   8.00
	$                54.40	$                56.00

(3)

	Year 1	Year 2
Variable costing net operating income (loss)	$       (190,000)	$       (140,000)
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing	$            64,000
Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing		$          (80,000)
Absorption costing net operating income (loss)	$       (126,000)	$       (220,000)