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 $ 90,000 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 $59 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.

Answer 1

1a.

Computation of Unit Product Cost
	Variable Costing
	Yr 1	Yr 2
Direct Meterial	$ 27	$ 27
Direct Labour	$ 12	$ 12
Variable Manufactoring Overhead	$   4	$   4
Unit Product Cost	$ 43	$ 43

1b.

Variable Costing income statement
	Yr 1	Yr 2
Sales	40,000*$59 = $2,360,000	50,000*$59 = $2,950,000
Less: Variable Expenses
Direct Meterial	40,000*$27 = $1,080,000	50,000*$27 = $1,350,000
Direct Labour	40,000*$12 = $480,000	50,000*$12 = $600,000
Variable Manufactoring Overhead	40,000*$4 = $160,000	50,000*$4 = $200,000
Variable Selling and admin exp.	40,000*$3 = $120,000	50,000*$3 = $150,000
Total Variable Expenses	$                             1,840,000	$                             2,300,000
Contribution Margin	$                                 520,000	$                                 650,000
Fixed Expenses:
Fixed manufacturing overhead	$                                 240,000	$                                 240,000
Fixed selling and admin	$                                   90,000	$                                   90,000
Total Fixed Expenses	$                                 330,000	$                                 330,000
Net Operating Income	$                                 190,000	$                                 320,000

2a.

Computation of Unit Product Cost
	Absorption Costing
	Yr 1	Yr 2
Direct Meterial	$                                     27.00	$                              27.00
Direct Labour	$                                     12.00	$                              12.00
Variable Manufactoring Overhead	$                                       4.00	$                                 4.00
Fixed Manufactoring Overhead	$240,000/50,000 = $4.80	$240,000/40,000 = $6
Unit Product Cost	$                                     47.80	$                              49.00

2b.

Absorption Costing Income statement
	Yr 1	Yr 2
Sales	40,000*$59 = $2,360,000	50,000*$59 = $2,950,000
Cost of Goods Sold	40,000*$47.80 = $1,912,000	(40,000*$49)+(10,000*$47.80)= $2,438,000
Gross Margin	$                                                 448,000	$                                                                       512,000
Selling and Administrative Exp.	(40,000*$3)+$90,000 = $210,000	(50,000*$3)+$90,000 = $240,000
Net Operating Income	$                                                 238,000	$                                                                       272,000

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