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		$ 30
Direct labor		$ 17
Variable manufacturing overhead		$ 2
Variable selling and administrative		$ 1
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
Fixed selling and administrative expenses	$	80,000

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 $53 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. (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

1. COMPUTATION OF COST PER UNIT USES VARIABLE COSTING :

(A)COMPUTATION OF UNIT COST

PARTICULARS	YEAR 1	YEAR 2
direct material	30	30
dirext labour	17	17
variable manufacturing overheads	2	2
COST PER UNIT	49	49

COST PER UNIT = DIRECT MATERIAL + DIRECT LABOUR + VARIABLE MANUFACTURING

                               OVERHEADS

(B) INCOME STATEMENT FOR YEAR 1 AND YEAR 2 :

PARTICULARS	YEAR1	YEAR 2
sales(number of units sold * selling cost per unit)	2120000	2650000
variable expenses
variable cost of goods sold (number of units sold * cost per unit)	1960000	2450000
variable selling and administrative oh (number of units sold * variable cost per unit)	40000	50000
total variable cost	2000000	2500000
margin (sales - total variable cost)	120000	150000
FIXED EXPENSES
fixed manufacturing overheads	320000	320000
fixed selling and administrative expenses	80000	80000
total fixed over heads	400000	400000
operating profit / (loss)	(280000)	(250000)

2) COMPUTATION OF COST PER UNIT USES ABSORBING COSTING :

(A) COMPUTATION OF UNIT COST

PARTICULARS	YEAR 1	YEAR 2
direct material	30	30
direct labour	17	17
variable manufacturing overheads	2	2
fixed manufacturing overheads (working note 1)	6.4	8
cost per unit	55.4	57

working note 1:

fixed manufacturing overheads = fixed manufacturing overheads / number of units produced

year 1 = 320000/50000 = 6.4

year 2 = 320000/40000 = 8

(B) INCOME STATEMENT FOR YEAR 1 AND YEAR 2 :

PARTICULARS	YEAR 1	YEAR 2
SALES	2120000	2650000
COST OF GOODS SOLD
opening inventory	-----	(10000*55.4) = 554000
cost of goods manufactured (number of units produced * total cost per unit)	2770000	2280000
closing inventory	(554000)	-----
cost of goods sold	2216000	2834000
loss (cost of goods sold - sales)	(96000)	(184000)
selling and administrative expenses
variable expenses	40000	50000
fixed selling and administarative expenses	80000	80000
total	120000	130000
net income (loss)	(216000)	(314000)

(c) computation of difference between variable costing and absorption costing net operating income in year 1 and year 2

PARTICULARS	YEAR 1	YEAR 2
variable costing net operating income	(280000)	(250000)
absorption costing net operating income	(216000)	(314000)
total	(64000)	(64000)