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 $ 25 $ 16 Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expenses $90,000 $320,000 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 $84 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. 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

1. Calculation of Unit cost Under Variable Costin Direct Material Direct Labour Variable Manufacturing Overhead 25 16 4 45 25 16 4 45 1a) Units Product Cost Under Variable Costing Year 1 Year 2 Unit Product Cost 45.00 45.00 Income Statement Under Variable Costing Year 1 Year 2 Sales (@84) Variable Expense Variable Cost Of Goods Sold (@45) Variable Selling and Administrative Expense (@3 Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads Fixed Sellingand Administrative Expenses Total fixed Expenses Net Operating Income 3360000 4200000 1800000 2250000 120000 150000 1920000 2400000 1440000 1800000 320000 90000 410000 410000 1030000 1390000 320000 90000

Assume the Absorption costin 2. Calculation of Unit cost Under Absorption Costin;g Year 1 Year 2 Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head (320000/50000),(320000/40000) Units Product Cost 2a) Units Product Cost Under absorption Costing 25 16 4. 25 16 4. 6.4 51.40 8 53.00 Year 1 Year 2 Unit Product Cost 51.40 53.00 2.b Income Statement Under Absorption Costing Year 1 Year 2 Sales (@84) Cost of Goods Sold Gross Margin Selling and Administrative Overheads ( Varaible +Fixed) Net Operating Income 3360000 4200000 2056000 2634000 1304000 1566000 210000 240000 1094000 1326000

3 Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Income(Loss) Add Fixed Manufacturing Overheads cost Deferred in inventory LESS: Fixed Manufacturing Overheads cost released From inventory Absorption Costing Income(loss) 10300001390000 64000 64000 1094000 1326000 Working Note -1 Year 1 Year 2 Units Produced Units Sol<d Difference in units -(Produces Sold) Difference in manufacturing overheads- (Difference in units*fixed manufacturing OH per unit) 10000 -10000

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