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		$ 25
Direct labor		$ 18
Variable manufacturing overhead		$ 4
Variable selling and administrative		$ 3
Fixed costs per year:
Fixed manufacturing overhead	$	240,000
Fixed selling and administrative expenses	$	60,000

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. (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

Compute the Variable costing Unit Product cost
				Year 1	Year 2
Direct Material			25	25
Direct labour			18	18
Variable Manufacturing overheads	4	4
Variable costing unit prroduct cost	47	47
Construct The Variable Costing Income Statement under FIFO
				YEAR 1	YEAR 2
Sales					24,00,000		30,00,000
Less: Variable cost
variable cost of goods sold		18,80,000		23,50,000
Variable selling expense		1,20,000	20,00,000	1,50,000	25,00,000
Contribution margin				4,00,000		5,00,000
Fixed expense:
Fixed Manufacturing overheads		2,40,000		2,40,000
Fixed selling expense			60,000		60,000
Net operating Income			1,00,000		2,00,000
Construct The Absorption Costing Unit Product Cost
				Year 1	Year 2
Direct Material			25	25
Direct labour			18	18
Variable Manufacturing overheads	4	4
Fixed Manufacturing overheads		4.80	6.00
Absorption costing unit prroduct cost	51.80	53.00
Construct the Absorption Costing Income Statement Under FIFO
				Year 1	Year 2
Sales				$24,00,000	$30,00,000
Cost of Goods sold			2072000	2638000	(10000*51.80+40000*53)
Gross Margin			$3,28,000	$3,62,000
Selling and distribution expense		1,80,000	2,10,000
Net operating income		1,48,000	1,52,000
Reconciliation Statement
					Year-1	Year-2
Net Income as pr Variable costing		100000	200000
Add: Fixed MFg overheads deferred in ending inventory	48000
Less: Fixed Mfg oh released in beginning inventory		48000
Net Income as per Absorption costing		148000	152000