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	$	11
Variable manufacturing overhead	$	5
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
Fixed selling and administrative expenses	$	90,000

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.

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

	unit product cost
a.					Year 1	Year 2
	unit product cost				37	37
	notes
	Direct materials					21
	direct labor					11
	Variable manufacturing overhead					5
	unit product cost					37
b.		income statement
					year 1	year 2
	Sales	(40000*58);(50000*58)			2320000	2900000
	Variable expenses
	Variable cost of goods sold				1480000	1850000
	Variable selling and adm				160000	200000
	total variable expense				1640000	2050000
	Contribution margin				680000	850000
	Fixed expense
	Fixed manufacturing overhead				320,000	320,000
	Fixed selling & adm expense				90,000	90,000
	total fixed expense				410,000	410,000
	Net income				270,000	440,000
2)	unit product cost
a)					Year 1	Year 2
	unit product cost				43.4	45
	notes					year 1	year 2
	Direct materials					21	21
	direct labor					11	11
	Variable manufacturing overhead					5	5
	FMOH (320,000/50,000)….(320,000/40000)					6.4	8
	unit product cost					43.4	45
b)		income statement
					year 1	year 2
	Sales				2320000	2900000
	cost of goods sold				1736000	2234000
	Gross margin				584000	666000
	Selling and administrative expense				250,000	290,000
	Net income				334,000	376000
	cost of goods sold for year 2 (10,000*43.4+40000*45)
3)	Reconcilaition						year 1	year 2
	Variable costing net operating income (loss)						270,000	440,000
	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)						334,000	376,000