Question

Exercise 6-9 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2, LO6-3]

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	$	27
Direct labor	$	12
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 $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

solution 1a:
Computation of Unit Product Cost - Variable Costing
Particulars	Year 1	Year 2
Unit Product Cost:
Direct material	$27.00	$27.00
Direct Labor	$12.00	$12.00
Variable manufacturing overhead	$4.00	$4.00
Unit product cost	$43.00	$43.00

Solution 1b:
Income Statement - Variable Costing - Walsh Company
Particulars	Per Unit	Year 1	Year 2
Sales	$58.00	$2,320,000.00	$2,900,000.00
Variable Costs:
Variable manufacturing Costs	$43.00	$1,720,000.00	$2,150,000.00
Variable Selling and administrative expenses	$3.00	$120,000.00	$150,000.00
Total Variable Costs	$46.00	$1,840,000.00	$2,300,000.00
Contribution Margin	$12.00	$480,000.00	$600,000.00
Fixed Expenses:
Fixed manufacturing overhead		$240,000.00	$240,000.00
Fixed Selling & Administrative Expenses		$60,000.00	$60,000.00
Net Operating Income		$180,000.00	$300,000.00

Solution 2a:
Computation of Unit Product Cost - Absorption Costing
Particulars	Year 1	Year 2
Unit Product Cost:
Direct material	$27.00	$27.00
Direct Labor	$12.00	$12.00
Variable manufacturing overhead	$4.00	$4.00
Fixed manufacturing overhead ($240,000 / Nos of unit produced)	$4.80	$6.00
Unit Product Cost	$47.80	$49.00

Solution 2b:
Income Statement - Absorption Costing - Walsh Company
Particulars	Year 1	Year 2
Details	Amount	Details	Amount
Sales		$2,320,000.00		$2,900,000.00
Cost of Goods Sold:
Cost of goods produced	$2,390,000.00		$1,960,000.00
Less: Ending Inventory	$478,000.00		$0.00
Add: Opening Inventory	$0.00	$1,912,000.00	$478,000.00	$2,438,000.00
Gross Profit		$408,000.00		$462,000.00
Variable Selling & Administrative Expenses		$120,000.00		$150,000.00
Fixed Selling & Administrative Expenses		$60,000.00		$60,000.00
Net Operating Income		$228,000.00		$252,000.00

Solution 3:
Reconciliation of Net Operating income under absorption costing & Variable Costing - Year 1
Particulars	Amount
Net Operating Income - Variable Costing	$180,000.00
Add : Fixed manufacturing overhead deferred in inventory ($4.80*10000)	$48,000.00
Less: Fixed manufacturing overhead released in inventory	$0.00
Net Operating Income - Absorption Costing	$228,000.00