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	$	27
Direct labor	$	12
Variable manufacturing overhead	$	5
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
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 $55 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

Unit Product Cost Under Absorption Costing Year 2 Particulars Direct Material Direct Labor Manufacturing Overhead Fixed Manufacturing Overhead Total Production Cost Per Unit 1 Amount ($) Amount ($) 13,50,000.00 10,80,000.00 6,00,000.00 4,80,000.00 2,50,000.00 2,00,000.00 3,20,000.00 3,20,000.00 25,20,000.00 20,80,000.00 50,000.00 40,000.00 50.40 52.00 Unit Product Cost Under Variable Costing Year Particulars Direct Material Direct Labor Variable manufacturing Overhead Cost Per Unit 1 2 Amount ($) Amount ($) 27.00 27.00 12.00 12.00 5.00 5.00 $ 44.00 $ 44.00

2 55.00 50,000.00 27,50,000.00 Walsh Company Income Statement (Variable Costing) Year 1 Particulars Amount ($) Selling Price Per Unit 55.00 Units Sold 40,000.00 Sales Revenue 22,00,000.00 Less :- Variable Cost of goods sold Opening Inventory Add:- Variable Cost of goods manufactured 22,00,000.00 Less:- Closing Inventory -4,40,000.00 Gross Contribution Margin 4,40,000.00 Less:-Variable Selling and administrative -1,60,000.00 Contribution Margin 2,80,000.00 Less:- Fixed Cost Fixed manufacturing overhead -3,20,000.00 Fixed Selling and administrative -80,000.00 Net operating income (loss) -1,20,000.00 4,40,000.00 17,60,000.00 5,50,000.00 -2,00,000.00 3,50,000.00 -3,20,000.00 -80,000.00 -50,000.00 Income Statement (Absorption Costing) Year 1 2 Particulars Amount ($) Amount ($) Selling Price Per Unit 55.00 55.00 Units Sold 40,000.00 50,000.00 Sales Revenue 22,00,000.00 27,50,000.00 Less:- Cost of goods sold Opening Inventory 5,04,000.00 Add:- Cost of goods manufactured 25,20,000.00 20,80,000.00 Less :- Closing Inventory -5,04,000.00 Gross Profit 1,84,000.00 1,66,000.00 Less:- SG&A Units Sold -1,60,000.00 -2,00,000.00 Fixed Selling and adminisitrative Expenses -80,000.00 -80,000.00 Net operating income (loss) -56,000.00 -1,14,000.00

Reconciliation Year 1 Particulars Variable Costing net operating income (loss) Fixed Manufacturing overhead deferred in inventory (10,000 x (50.4-44) Fixed Manufacturing overhead released from inventory Absorption Costing net operating income (loss) Amount ($) -1,20,000.00 64,000.00 -50,000.00 0 -64,000.00 -1,14,000.00 $ -56,000.00 $