Question

Walsh company manufactures and sells one product. The following information pertains to each of the company s first two years of operations.
Direct materials.     25$
Direct labor.             10$
Variable manufacturing overhead   4$
Variable selling and administrative. 3$
Fixed manufacturing overhead. 240000$
Fixed selling and administrative expenses. 60000$
During its first year of operations , Walsh produced 50000 units and sold 40000 units. During its second year of operations , it produced 40000 units and sold 50000 units. The selling price of the company s product is 54 $ per unit.
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.
Reconcile the difference between variable costing and absorption costing net operating income in Year 1.

Answer 1

a) Computation of unit product cost for year 1 and year 2

Computation of unit product cost
	Year 1	Year 2
Direct material	$                      25	$                      25
Direct Labor	$                      10	$                      10
Variable Manufacturing overhead	$                         4	$                         4
Variable Selling and administration overhead	$                         3	$                         3
Total Variable cost per unit	$                      42	$                      42
Fixed manufacturing overhead	$            240,000	$            240,000
Fixed selling and administration overhead	$              60,000	$              60,000
Total fixed expenses	$            300,000	$            300,000
Number of units produced	$              50,000	$              40,000
Fixed expenses per unit	$                         6	$                         8
Total cost per unit	$                      48	$                      50

b) Income statement for Year 1 and Year 2 as per Absorption and Marginal Costing and Reconciliation:

Income Statement (Absorption costing)
	Year 1	Year 2
1	Sales	$        2,160,000	$        2,700,000
2	Cost of Goods Sold
3	Opening Inventory	$                       -	$            438,000
4	Cost of Goods Manufactured (Working Note)	$        2,190,000	$        1,800,000
5	Cost of Goods available for sale (3+4)	$        2,190,000	$        2,238,000
6	Closing inventory	$            438,000	$                       -
7	Cost of goods sold (5-6)	$        1,752,000	$        2,238,000
8	Gross profit(1-7)	$            408,000	$            462,000
9	Selling and Administration expenses
10	Variable	$            150,000	$            120,000
11	Fixed	$              60,000	$              60,000
12	Total selling and administration expenses(10+11)	$            210,000	$            180,000
13	Net Operating Income(8-12)	$            198,000	$            282,000

Working note:

Cost of Goods Manufactured
	Year 1	Year 2
Number of units produced	50000	40000
Direct material	$        1,250,000	$        1,000,000
Direct Labor	$            500,000	$            400,000
Variable Manufacturing overhead	$            200,000	$            160,000
Fixed manufacturing overhead	$            240,000	$            240,000
Total cost of goods manufactured	$        2,190,000	$        1,800,000
Cost of goods manufactured per unit	$                      44	$                      45

Income Statement (Variable costing)
1	Sales	2,160,000	2,700,000
2	Variable expenses
3	Opening invetory	-	390,000
4	Cost of Goods Manufactured	1,950,000	1,560,000
5	Cost of Goods available for sale(3+4)	1,950,000	1,950,000
6	Closing inventory	390,000	-
7	Cost of goods sold(5-6)	1,560,000	1,950,000
8	Selling and Administration overhead	150,000	120,000
9	Contribution Margin(1-7-8)	450,000	630,000
10	Fixed Expenses
11	Manufacturing	240,000	240,000
12	Selling and Administration	60,000	60,000
13	Net Operating Income(9-11-12)	150,000	330,000

Reconciliation Statement
	Year 1	Year 2
1	Net Operating Income as per Variable Costing	$            150,000	$            330,000
2	Fixed manufacturing overhead in inventory deffered	$              48,000
	10000 x (240,000/50000)
3	Fixed manufacturing overhead in inventory released		$            (48,000)
4	Net Operating Income as per Absorption Costing	$            198,000	$            330,000