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	$	29
Direct labor	$	13
Variable manufacturing overhead	$	5
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
Fixed selling and administrative expenses	$	60,000

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 $84 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.

Answer 1

a.	Computation of Unit product cost :
					Year 1	Year 2
	unit product cost				47	47
	Working :
	Direct materials					29
	direct labor					13
	Variable manufacturing overhead					5
	unit product cost					47
b.		income statement
					year 1	year 2
	Sales				3360000	4200000
	Variable expenses :
	Variable cost of goods sold				1880000	2350000
	Variable selling and adm				160000	200000
	total variable expense				2040000	2550000
	Contribution margin				1320000	1650000
	Fixed expense :
	Fixed manufacturing overhead				320,000	320,000
	Fixed selling & adm expense				60,000	60,000
	total fixed expense				380,000	380,000
	Net income				940,000	1,270,000
2)	Computation of Unit product cost :
a)					Year 1	Year 2
	unit product cost				53.4	55
						year 1	year 2
	Direct materials					29	29
	direct labor					13	13
	Variable manufacturing overhead					5	5
	FMOH (320000/50000, 320000/40000)					6.4	8
	unit product cost					53.4	55
b)		income statement
					year 1	year 2
	Sales				3360000	4200000
	cost of goods sold				2136000	2734000
	Gross margin				1224000	1466000
	Selling and administrative expense				220,000	260,000
	Net income				1,004,000	1,206,000
	cost of goods sold for year 2 (10000*53.4+40000*55))
3)	Reconcilaition						year 1	year 2
	Variable costing net operating income (loss)						940,000	1,270,000
	add:Deferrred fixed overhead in ending inventory (10000*6.4))						64,000
	less:Fixed overhead realeased in beginning inventory(10000*6.4)							-64,000
	Absoption costing net operatin income (loss)						1,004,000	1,206,000