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	$	30
Direct labor	$	13
Variable manufacturing overhead	$	7
Variable selling and administrative	$	6
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
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 $58 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 answers 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

2-a. Unit product cost under variable costing = Direct material + Direct labor +variable manufacturing overheads
	Year 1	Year 2
Unit product cost	50	50
Variable costing income statement
Units sold	60000	50000
	Year 1	Year 2
Sales	2,320,000	2,900,000
Variable expenses
Variable COGS	2,000,000	2,500,000
Variable Selling and Admin	240,000	300,000
Total variable expenses	2,240,000	2,800,000
Contribution Margin	80,000	100,000
Fixed Expenses
Fixed manufacturing overhead	320,000	320,000
Fixed selling and admin	60,000	60,000
Total Fixed expenses	380,000	380,000
Net Operating Income	(300,000)	(280,000)
2-a. Unit product cost under absorption costing = Direct material + Direct labor +variable manufacturing overheads+ Fixed manufacturing overhead
	Year 1	Year 2
Unit product cost	56.4	58
Absorption costing Income Statement
	Year 1	Year 2
Sales	2,320,000	2,900,000
Cost of goods sold	2,256,000	2,884,000
Gross Profit	64,000	16,000
Selling and Admin expenses	300,000	360,000
Net Operating income	(236,000)	(344,000)
Reconciliation
	Year 1	Year 2
Profit under Variable costing	(300,000)	(280,000)
Fixed manufacturing overhead deferred/Released = Difference in units produced and sold*Per unit	64000	-64000
Profit under Absorption costing	(236,000)	(344,000)