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	$	29
Direct labor	$	10
Variable manufacturing overhead	$	3
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	240,000
Fixed selling and administrative expenses	$	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 $60 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

Req 1 (a)
The Variable costing Unit Product cost
	Year 1	Year 2
Direct Material	$29.00	$29.00
Direct labour	$10.00	$10.00
Variable Manufacturing overheads	$3.00	$3.00
Variable costing unit product cost	$42.00	$42.00

Req 1(b)
The Variable Costing Income Statement
	YEAR 1		YEAR 2
Unit sold	40000		50000
Sales		$24,00,000.00		$30,00,000.00
Less: Variable cost
variable cost of goods sold	$16,80,000.00		$21,00,000.00
Variable selling expense	$80,000.00	$17,60,000.00	$1,00,000.00	$22,00,000.00
Contribution margin		$6,40,000.00		$8,00,000.00
Fixed expense:
Fixed Manufacturing overheads		$2,40,000.00		$2,40,000.00
Fixed selling expense		$70,000.00		$70,000.00
Net operating Income		$3,30,000.00		$4,90,000.00

Req 2(a):
The Absorption Costing Unit Product Cost
	Year 1	Year 2
Direct Material	$29.00	$29.00
Direct labour	$10.00	$10.00
Variable Manufacturing overheads	$3.00	$3.00
Fixed Manufacturing overheads (240000/50000, 40000)	$4.80	$6.00
Absorption costing unit product cost	$46.80	$48.00

Req 2(b):
The Absorption Costing Income Statement
	Year 1	Year 2
Unit sold	40000	50000
Sales	$24,00,000.00	$30,00,000.00
Cost of Goods sold	$18,72,000.00	$24,00,000.00
Gross Margin	$5,28,000.00	$6,00,000.00
Selling and distribution expense	$1,50,000.00	$1,70,000.00
Net operating income	$3,78,000.00	$4,30,000.00

Reconciliation of Net Operating Income
Year	Year-1	Year-2
Net Income as per Variable costing	$3,30,000.00	$4,90,000.00
Add: Diff in Valuation of Inventory due to Fixed Manfacturing OH
Year-1- ( 50000-40000)*4.80	$48,000.00
Year-2- ( 40000-50000)*6		-$60,000.00
Net Income as per Variable costing	$3,78,000.00	$4,30,000.00