Question

Exercise 7-9 Variable and Absorption Costing Unit Product Costs and Income Statements [LO7-1, LO7-2, LO7-3]

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	$	28
Direct labor	$	13
Variable manufacturing overhead	$	3
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
Fixed selling and administrative expenses	$	100,000

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 $81 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				44	44
	notes
	Direct materials					28
	direct labor					13
	Variable manufacturing overhead					3
	unit product cost					44
b.	Variable	income statement
					year 1	year 2
	Sales	(40000*81);(50000*81)			3240000	4050000
	Variable expenses
	Variable cost of goods sold				1760000	2200000
	Variable selling and adm				80000	100000
	total variable expense				1840000	2300000
	Contribution margin				1400000	1750000
	Fixed expense
	Fixed manufacturing overhead				320,000	320,000
	Fixed selling & adm expense				100,000	100,000
	total fixed expense				420,000	420,000
	Net income				980,000	1,330,000
2)	unit product cost
a)					Year 1	Year 2
	unit product cost				50.4	52
	notes					year 1	year 2
	Direct materials					28	28
	direct labor					13	13
	Variable manufacturing overhead					3	3
	FMOH (320,000/50,000)….(320,000/40000)					6.4	8
	unit product cost					50.4	52
b)		income statement
					year 1	year 2
	Sales				3240000	4050000
	cost of goods sold				2016000	2584000
	Gross margin				1224000	1466000
	Selling and administrative expense				180,000	200,000
	Net income				1,044,000	1266000
	cost of goods sold for year 2 (10,000*50.4+40000*52)
3)	Reconcilaition						year 1	year 2
	Variable costing net operating income (loss)						980,000	1,330,000
	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)						1,044,000	1,266,000