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	$	28
Direct labor	$	10
Variable manufacturing overhead	$	3
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
Fixed selling and administrative expenses	$	50,000

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 $56 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.   

Assume the company uses variable costing. Compute the unit product cost for year 1 and year 2.

	Year 1 Year 2 Unit product cost

Assume the company uses variable costing. Compute the unit product cost for year 1 and year 2.

Year 1 Year 2 Unit product cost Walsh Company Income Statement Year 1 Year 2 0 0 0 0 0 Net operating income (loss) $() $0 Assume the company uses absorption costing. Compute the unit product cost for Year 1 and Year 2. (Round your answer to 2 decimal places.) Year 1 Year 2 Unit product cost Walsh Company Income Statement Year 1 Year 2 $0 $0 Year 1 Year 2 Variable costing net operating income (loss) $ Absorption costing net operating income (loss)

Answer 1

	unit product cost
a.					Year 1	Year 2
	unit product cost				41	41
	notes
	Direct materials					28
	direct labor					10
	Variable manufacturing overhead					3
	unit product cost					41
b.		income statement
					year 1	year 2
	Sales	(40000*56);(50000*56)			2240000	2800000
	Variable expenses
	Variable cost of goods sold				1640000	2050000
	Variable selling and adm				80000	100000
	total variable expense				1720000	2150000
	Contribution margin				520000	650000
	Fixed expense
	Fixed manufacturing overhead				320,000	320,000
	Fixed selling & adm expense				50,000	50,000
	total fixed expense				370,000	370,000
	Net income				150,000	280,000
2)	unit product cost
a)					Year 1	Year 2
	unit product cost				47.4	49
	notes					year 1	year 2
	Direct materials					28	28
	direct labor					10	10
	Variable manufacturing overhead					3	3
	FMOH (320,000/50,000)….(320,000/40000)					6.4	8
	unit product cost					47.4	49
b)		income statement
					year 1	year 2
	Sales				2240000	2800000
	cost of goods sold				1896000	2434000
	Gross margin				344000	366000
	Selling and administrative expense				130,000	150,000
	Net income				214,000	216000
	cost of goods sold for year 2 (10,000*47.4+40000*49)
3)	Reconcilaition						year 1	year 2
	Variable costing net operating income (loss)						150,000	280,000
	add:Deferrred fixed overhead in ending inventory (10000*6.4)						64,000
	less:Fixed overhead realeased in beginning inventory(10000*6.4)							-64,000
	Absoption costing net operatin income (loss)						214,000	216,000