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 $ 26 Direct labor $ 13 Variable manufacturing overhead $ 3 Variable selling and administrative $ 2 Fixed costs per year: Fixed manufacturing overhead $ 240,000 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 $52 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. (Round your answer to 2 decimal places.) b. Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places) 3. Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2.

Answer 1

Answer :

1.a. Calculation of unit product cost under variable costing method -

Year 1 - $ 42.00

Year 2 - $ 42.00

1. b. Preparation of income statement for year 1 and year 2 under variable costing method :

Net income -

• Year 1 = $ 0
• Year 2 = $ 80,000

Working Notes :

1. Sales =

• Year 1 = 40,000 × 52 = $1,680,000
• Year 2 = 50,000 × 52 = $2,600,000

2. Variable Cost of Goods sold =

• Year 1 = 40,000 × 42 = $ 1,680,000
• Year 2 = 50,000 × 42 = $ 2,100,000

3. Variable selling and administration expense =

• Year 1 = 40,000 × 2 = $ 80,000
• Year 2 = 50,000 × 2 = $ 100,000

2.a. Calculation of unit product cost using absorption costing method -

Year 1 = $ 46.80

Year 2 = $ 48.00

2.b. Preparation of income statement under absorption costing method -

Net income -

• Year 1 = $ 48,000
• Year 2 = $ 32,000

Working Notes :

1. Sales =

• Year 1 = 40,000 × 52 = $ 2,080,000
• Year 2 = 50,000 × 52 = $ 2,600,000

2. Cost of Goods sold -

• Year 1 = 40,000 × 46.80 = $ 1,872,000
• Year 2 = 10,000 × 46.80 + 40,000 × 48 = $ 2,388,000

Note : Total units sold in year 2 is 50,000 units. In this, only 40,000 units where produced in year 2. So, the balance 10,000 units sold where the inventory balance from year 1.

3. Variable selling and administration expense -

• Year 1 = 40,000 × 2 = $ 80,000
• Year 2 = 50,000 × 2 = $ 100,000

3. Preparation of Reconciliation Statement for the year 1 and year 2

	Year 1	Year 2
Net income under variable costing	$ 0	$80,000
Add : Deferred fixed overhead in closing inventory (10,000 × 4.80)	48,000
Less : Deferred fixed overhead in opening inventory (10,000 × 4.80)		(48,000)
Net Income under absorption costing	$48,000	$32,000

Note :

	Opening Inventory	Units Produced	Units Sold	Closing Inventory
Year 1	-	50,000	40,000	10,000
Year 2	10,000	40,000	50,000	-