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	$	18
Variable manufacturing overhead	$	5
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	400,000
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 $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.

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

WORKING NOTES : 1	Year 1	Year 2
	beginning Inventory	-	10,000
	Unit Produced =	50,000	40,000
	Unit Sold =	40,000	50000
	Closing Stock	10,000	-
Solution: 1(A)
	CALCUALTION OF cost of production units by using Variable Costing for year 1 & Year 2
	Particulars	Variable Costing Amount
	Direct Materials	$                           21.00
	Direct Labor	$                           18.00
	Variable Manufacturing Overhead	$                             5.00
	Fixed Manufacturing Overhead (Not Taken)	$                                  -
	Cost of Production per unit	$                           44.00
	Answer = Unit Cost for Year 1 & Year 2 = $ 44.00
Solution: 1(B)
	VARIABLE COSTING INCOME STATEMENTS	Variable Costing	Variable Costing
	Particulars	Year 1	Year 2
	Sales	$                  20,80,000	$                 26,00,000
		(40,000 Units X $ 52)	(50,000 Units X $ 52)
	Cost of Goods Sold
	Beginning inventory (10,000 Units X $ 44)	$                                  -	$                    4,40,000
	Cost of Goods Manufactured(50,000 Units X $ 44) (40,000 Units X $ 44)	$                  22,00,000	$                 17,60,000
	Ending inventory (10,000 Units X $ 44)	$                     4,40,000
	Cost of Goods Sold	$                  17,60,000	$                 22,00,000
	Variable Selling Expenses (40,000 X $ 4) ( 50,000 Units X $ 4)	$                     1,60,000	$                    2,00,000
	Gross Profit	$                     1,60,000	$                    2,00,000
	Less: Fixed Cost
	Fixed Manufacturing overhead	$                     4,00,000	$                    4,00,000
	Fixed Selling Expenses	$                        70,000	$                       70,000
	Net Income	$                   -3,10,000	$                  -2,70,000
Solution: 2(A)
	CALCUALTION OF cost of production units by using Absorption Costing for year 1 & Year 2
	Particulars	Variable Costing Amount - Year 1	Variable Costing Amount - Year 2
	Direct Materials	$                           21.00	$                          21.00
	Direct Labor	$                           18.00	$                          18.00
	Variable Manufacturing Overhead	$                             5.00	$                            5.00
	Fixed Manufacturing Overhead $ 400,000 /50,000) ($400,000 / 40,000)	$                             8.00	$                          10.00
	Cost of Production per unit	$                           52.00	$                          54.00
	Answer = Unit Cost for Year 1 & Year 2 = $ 44.00
Solution: 2(B)
	ABOSRPTION COSTING INCOME STATEMENTS	Absorption Costing	Absorption Costing
	Particulars	Prior Year	Current Year
	Sales	$                  20,80,000	$                 26,00,000
	Cost of Goods Sold
	Beginning inventory (10,000 Units X $ 52)	$                                  -	$                    5,20,000
	Cost of Goods Manufactured(50,000 Units X $ 52) (40,000 Units X $ 52)	$                  26,00,000	$                 20,80,000
	Ending inventory (10,000 Units X $ 52)	$                     5,20,000	$                                 -
	Cost of Goods Sold	$                  20,80,000	$                 26,00,000
	Gross Profit	$                                  -	$                                 -
	Less : Selling Expenses
	Fixed general and administrative expenses	$                        70,000	$                       70,000
	Variable Selling Expenses (40,000 X $ 4) ( 50,000 Units X $ 4)	$                     1,60,000	$                    2,00,000
	Net Income	$                   -2,30,000	$                  -2,70,000
SOLUTION = 3
	RECONCILIATION OF VARIABLE COSTING INCOME AND ABSOTPION COSTING INCOME
		YEAR 1
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