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	$	27
Direct labor	$	13
Variable manufacturing overhead	$	5
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	400,000
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 $54 per unit.

Required:

1. Assume the company uses variable costing:

a. Compute the unit product cost for year 1 and year 2.

Year 1 __________

Year 2 __________

b. Prepare an income statement for year 1 and year 2.
	Walsh Company Income Statement Year 1 Year 2 Variable expenses Total variable expenses Fixed expenses Total fixed expenses

2. Assume the company uses absorption costing:

a. Compute the unit product cost for year 1 and year 2. (Round your answers to 2 decimal places.)

Year 1_____________

Year 2 _____________

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

	Walsh Company Income Statement Year 1 Year 2 Net operating income (loss)

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

	Year 1	Year 2
Variable Costing Net Operating income (loss)
Manufacturing Overhead Cost (Released OR deffered)
Manufacturing Overhead Cost (Released or Deffered)
Absorption Costing Net operating income (loss)

Answer 1

Solution 1a:

Computation of Unit Product Cost - Variable Costing
Particulars	Year 1	Year 2
Unit Product Cost:
Direct material	$27.00	$27.00
Direct Labor	$13.00	$13.00
Variable manufacturing overhead	$5.00	$5.00
Unit Product Cost	$45.00	$45.00

Solution 1b:

Variable costing contribution format income statement
Particulars	Year 1		Year 2
	Details	Amount	Details	Amount
Sales	40000*$54	$2,160,000.00	50000*$54	$2,700,000.00
Variable Cost:
Variable manufacturing cost	40000*$45	$1,800,000.00	50000*$45	$2,250,000.00
Variable Selling and Administrative Expenses	40000*$4	$160,000.00	50000*$4	$200,000.00
Contribution		$200,000.00		$250,000.00
Fixed Manufacturing Overhead		$400,000.00		$400,000.00
Fixed Selling & Administrative Expenses		$90,000.00		$90,000.00
Net Income		-$290,000.00		-$240,000.00

Solution 2a:

Computation of Unit Product Cost - Absorption Costing
Particulars	Year 1	Year 2
Unit Product Cost:
Variable manufacturing cost	$45.00	$45.00
Fixed manufacturing overhead ($500,000 / Nos of unit produced)	$8.00	$10.00
Unit Product Cost	$53.00	$55.00

Solution 2b:

Income Statement - Absorption Cosing
Particulars	Year 1		Year 2
	Details	Amount	Details	Amount
Sales		$2,160,000.00		$2,700,000.00
Cost of Goods Sold:
Cost of goods produced	$2,650,000.00		$2,200,000.00
Add: Opening Inventory	$0.00		$530,000.00
Less: Ending Inventory	$530,000.00	$2,120,000.00	$0.00	$2,730,000.00
Gross Profit		$40,000.00		-$30,000.00
Variable Selling & Administrative Expenses		$160,000.00		$200,000.00
Fixed Selling & Administrative Expenses		$90,000.00		$90,000.00
Net Operating Income		-$210,000.00		-$320,000.00

Solution 3:

Reconciliation of Net Operating income under absorption costing & Variable Costing
Particulars	Year 1	Year 2
Net Operating Income - Variable Costing	-$290,000.00	-$240,000.00
Add : Fixed manufacturing overhead deferred in inventory Year 1 - $8*10000 Year 2 - 0	$80,000.00	$0.00
Less: Fixed manufacturing overhead released in inventory Year 1 - 0 Year 2 - $8*10000	$0.00	$80,000.00
Net Operating Income - Absorption Costing	-$210,000.00	-$320,000.00