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	$	21
Direct labor	$	11
Variable manufacturing overhead	$	4
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
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 $57 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

1 a.

	Year 1	Year 2
Direct Material	21	21
Direct labour	11	11
Variable Manufacturing overheads	4	4
Variable costing unit product cost	36	36

1 b.

	Year 1	Year 2
Sales	2280000	2850000
Less: Variable cost
Variable cost of goods sold	1440000	1800000
Variable selling expense	1,20,000	1,50,000
Total Variable cost	1560000	1950000
Contribution margin	720,000	900,000
Fixed expense:
Fixed Manufacturing overheads	320,000	320,000
Fixed selling expense	70,000	70,000
Net operating Income	330,000	510,000

2 a.

	Year 1	Year 2
Direct Material	21	21
Direct labour	11	11
Variable Manufacturing overheads	4	4
Fixed Manufacturing overheads	6.4*	8**
Absorption costing unit prroduct cost	42.4	44

* $320,000 / 50,000

** $320,000 / 40,000

2 b.

	Year 1	Year 2
Sales	2280000	2850000
Cost of Goods sold	1696000	2184000*
Gross Margin	584000	666000
Selling and distribution expense	190000	220000
Net operating income	394000	446000

* 10,000 * $42.40 + 40,000 * $44

3.

Absorption net income	394,000
Fixed manfacturing overheads in:
Add: Opening inventory	0
Less: Ending inventory (10,000 * 6.4)	-64000
Variable costing income	330,000