Question

Variable costs per unit: Manufacturing: Direct materials $ 27 Direct labor $ 13 Variable manufacturing overhead $ 2 Variable selling and administrative $ 1 Fixed costs per year: Fixed manufacturing overhead $ 320,000 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 $58 per unit.

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. (Round your answer to 2 decimal places.)

         

b.	Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places.)

   

3.	Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2.

Answer 1

Ans-1-(a)

Unit product cost = Total Variable Cost of Manufacturing / Units Produced.

The calculations are tabulated hereunder for both the Years:

Ans-1-(b)

Note Closing Stock at Year -1 = Production - Sold = 50000 - 40000 = 10000

Sales Revenue Year-1 = 58*40000 and Year-2 = 58*50000

Ans-2-(a)

Unit product cost = Total Cost of Manufacturing / Units Produced

Ans-2-(b)

Closing Stock of Year -1 = 10000*48.40=484000

Ans-3

In absorption costinig the Fixed Manufacturing overheads are considered for Inventory Valuation whreas in Variable Costing same are not and hence the difference in Inventory Valuation is the difference in Income under two methods.

Year-1

Closing Inventory under Variable Costing = 420000

Closing Inventory under Absorption Costing =  484000

Difference = 64000

The same difference is in profits reported under the two methods = 254000 - 190000 = 64000

Since Closing Stock valuation is high under Absorption costing so is the Income reported

Year-2

In year 2 the reverse happens as closing of Year 1 is opening of year 2 and hence the Income under Absorption costing is lower now as compared to Variable Income statement i,e, 340000 - 276000 = 64000

Since in Year1 there is no oening inventory and in year 2 there is no closing inventory the impacts are straight forward.