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	$	14
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 $58 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

Solution :

(1) Company uses Variable Costing :

(a)

Particulars	Year 1	Year 2
Unit Variable Cost ($ 27 + $ 14 + $ 4)	$ 45	$ 45

(b) Income Statement :

Particulars	Year 1	Year 2
Sales	$ 2,320,000	$ 2,900,000
Less: Variable cost
Variable cost of goods sold	$ 1,800,000	$ 2,250,000
Variable selling expense	$ 120,000	$ 150,000
Total Variable cost	$ 1,920,000	$ 2,400,000
Contribution margin	$ 400,000	$ 500,000
Fixed expense:
Fixed Manufacturing overheads	$ 240,000	$ 240,000
Fixed selling expense	$ 90,000	$ 90,000
Net operating Income	$ 70,000	$ 170,000

(1) Company uses Absorption Costing :

(a) Unit Cost :

Particulars	Year 1	Year 2
Direct Material	$ 27	$ 27
Direct Labor	$ 14	$ 14
Variable OH	$ 4	$ 4
Fixed Manufacturing OH ($ 240,000 / Units Produced)	$ 4.80	$ 6.00
Unit Variable Cost	$ 49.80	$ 51.00

(b) Income Statement :

Particulars	Year 1	Year 2
Sales	$ 2,320,000	$ 2,900,000
Less: Cost of goods sold	$ 1992,000	$ 2,538,000*
Gross Profit	$ 328,000	$ 362,000
Less : Selling and Distribution Expenses	$ 210,000	$ 240,000
Net operating Income	$ 118,000	$ 122,000

* Cost of Goods Sold = (10,000 * $ 49.80) + (40,000 * $ 51.00) = $ 2,538,000

(3) Reconciliation Statement :

Particulars	Year 1	Year 2
Net Income for the year as per Variable costing	$ 70,000	$ 170,000
Add: Fixed Mgf OH Deferred (10,000 * 4.80)	$ 48,000
Less: Fixed Mfg OH released (10,000 * 4.80)		$ 48,000
Net Income as per absorption costing	$ 118,000	$ 122,000

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