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 $ 23 Direct labor $ 16 Variable manufacturing overhead $ 4 Variable selling and administrative $ 3 Fixed costs per year: Fixed manufacturing overhead $ 320,000 Fixed selling and administrative expenses $ 50,000 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 $56 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.

I cant follow this answer, please break it down better. Please resend this answer

Answer 1

Variable Manufacturing costs:
Direct material	23
Direct labor	16
Variable Manufacturing overhead	4
Total Var. Mfg. Cost	43

Walsh Company
Variable Costing	Year I	Year II
Revenues:
40000 units x $56	2240000
50000 units x $56		2800000
Variable Costs:
Beginning Inventory	0	430000
Variable Manufacturing costs
50000 units x $43	2150000
40000 units x $43		1720000
Cost of goods available for sale	2150000	2150000
Ending Inventory
10000 units x $43	430000
Variable cost of goods sold	1720000	2150000
Variable selling & admin costs
40000 units x $3	120000
50000 units x $3		150000
Total Variable costs	1840000	2300000
Contribution margin (Sales - VC)	400000	500000
Fixed Costs:
Fixed manufacturing costs	320000	320000
Fixed selling & admin costs	50000	50000
Total Fixed Costs	370000	370000
Operating Income (CM - FC)	30000	130000

Absorption Costing	Year I	Year II
Revenues:
40000 units x $56	2240000
50000 units x $56		2800000
Cost of Goods Sold:
Beginning Inventory	0	430000
Variable Manufacturing costs
50000 units x $43	2150000
40000 units x $43		1720000
Fixed manufacturing costs	320000	320000
Cost of goods available for sale	2470000	2470000
Ending Inventory
$2470000 / 50000 x 10000	494000
Cost of goods sold	1976000	2470000
Gross margin (Sale - COGS)	264000	330000
Operating costs:
Variable selling & admin costs
40000 units x $3	120000
50000 units x $3		150000
Fixed selling & admin costs	50000	50000
Total operating costs	170000	200000
Operating Income (GM - OC)	94000	130000

Reconciliation:

The point of difference in operating income computed under Variable and Absorption costing methods lie in the treatment of ending inventory. Under variable costing, inventory doesn’t include fixed manufacturing cost whereas it is included under absorption costing system. As there was no ending inventory at the end of 2^nd year, there were no differences in the operating income either. This acts as a control check on the accuracy of the solution.

Ending inventory balance difference under 2 system: $494000 - $430000 = $64000

Operating income difference under these two systems: $94000 - $30000 = $64000