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		$ 21
Direct labor		$ 16
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 $57 per unit.

Required:

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. (Loss and deduction amounts should be indicated with a minus sign.)

Answer 1

	unit product cost
a.					Year 1	Year 2
	unit product cost				42	42
	notes
	Direct materials					21
	direct labor					16
	Variable manufacturing overhead					5
	unit product cost					42
b.		income statement
					year 1	year 2
	Sales	(40000*57);(50000*57)			2280000	2850000
	Variable expenses
	Variable cost of goods sold				1680000	2100000
	Variable selling and adm				160000	200000
	total variable expense				1840000	2300000
	Contribution margin				440000	550000
	Fixed expense
	Fixed manufacturing overhead				320,000	320,000
	Fixed selling & adm expense				80,000	80,000
	total fixed expense				400,000	400,000
	Net income				40,000	150,000
2)	unit product cost
a)					Year 1	Year 2
	unit product cost				48.4	50
	notes					year 1	year 2
	Direct materials					21	21
	direct labor					16	16
	Variable manufacturing overhead					5	5
	FMOH (320,000/50,000)….(320,000/40000)					6.4	8
	unit product cost					48.4	50
b)		income statement
					year 1	year 2
	Sales				2280000	2850000
	cost of goods sold				1936000	2484000
	Gross margin				344000	366000
	Selling and administrative expense				240,000	280,000
	Net income				104,000	86000
	cost of goods sold for year 2 (10,000*48.4+40000*50)
3)	Reconcilaition						year 1	year 2
	Variable costing net operating income (loss)						40,000	150,000
	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)						104,000	86,000