Question

Problem 2: 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 $ 25 Direct labor $ 18 Variable manufacturing overhead $ 3 Variable selling and administrative $ 2 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 $54 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.  

Answer 1

Walsh company
Variable costing			Absorption costing
	Year 1	Year 2			Year 1	Year 2
DM	25	25		DM	25	25
DL	18	18		DL	18	18
Var. mfg. OH	3	3		Var. mfg. OH	3	3
Product cost per unit	46	46		Fixed mfg. OH          ( 320000 / 50000 )	6.4	8	( 320000 / 40000)
				Product cost per unit	52.4	54
Selling and adm. Are period costs and not product costs
				Absorption costing
Variable Costing				Year 1	Year 2
				Units sold	40000	50000
	Year 1	Year 2		Sales	2160000	2700000
Units	40000	50000		Less:- Cost of Goods Sold
Sales	2160000	2700000		Less:- Variable COGS ( 46 * units sold)	1840000	2300000
Less:- Variable COGS ( 46 * units sold)	1840000	2300000		Fixed Manufacturing Overhead	256000	400000
Variable S and A expenses	80000	100000		Gross Profit	64000	0
Contribution Margin	240000	300000		Less:- Selling and administrative
Fixed Mfg. OH	320000	320000		Variable	80000	100000
Fixed S and A expenses	90000	90000		Fixed	90000	90000
Net Income/ (loss)	-170000	-110000		Net income	-106000	-190000