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		$ 26
Direct labor		$ 17
Variable manufacturing overhead		$ 4
Variable selling and administrative		$ 3
Fixed costs per year:
Fixed manufacturing overhead	$	240,000
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 $56 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. (Loss and deduction amounts should be indicated with a minus sign.)

          

References

eBook & Resources

Answer 1

1(a) Compute unit product cost under variable costing :
	Year 1	Year 2
Direct material	$26.00	$26.00
Direct labour	$17.00	$17.00
Variable manufacturing overhead	$4.00	$4.00
Unit product cost	$47.00	$47.00

2(b) Prepare an income statement for year 1 and year 2
	Unit Rate	Year 1	Year 2
Unit Sold		40000	50000
Sales	$56.00	$2,240,000.00	$2,800,000.00
Less: Variable production cost	$47.00	$1,880,000.00	$2,350,000.00
Manufacturing margin	$9.00	$360,000.00	$450,000.00
Less: Variable selling and administrative expens	$3.00	$120,000.00	$150,000.00
Contribution margin	$6.00	$240,000.00	$300,000.00
Less: Fixed Cost
Fixed manufacturing cost		$240,000.00	$240,000.00
Fixed selling and administrative expense		$60,000.00	$60,000.00
Net operating income		-$60,000.00	$0.00

2(a) Compute unit product cost under absorption costing :
	Year 1	Year 2
Direct material	$26.00	$26.00
Direct labour	$17.00	$17.00
Variable manufacturing overhead	$4.00	$4.00
Fixed manufacturing overhead ($240000/50000) & ($240000/40000)	$4.80	$6.00
Unit product cost	$51.80	$53.00

2(b) income statement
	year 1	year 2
Sales	$2,240,000.00	$2,800,000.00
cost of goods sold (40000*$51.80) & (50000*$53)	$2,072,000.00	$2,650,000.00
Gross margin	$168,000.00	$150,000.00
Selling and administrative expense
Variable Selling & Admin Expen	$120,000.00	$150,000.00
Fixed Selling Selling & Admin Expense	$60,000.00	$60,000.00
Net income	-$12,000.00	-$60,000.00

(3)RECONCILIATION :
	YEAR 1	YEAR 2
Variable Costing Net Operating Income (Loss)	-$60,000.00	$0.00
Add: Fixed Manufacturing Overhead Cost Deferred In Inventory Under Absorption Costing (4.8*10000)	$48,000.00
Less: Fixed Manufacturing Overhead Cost Released From Inventory Under Absorption Costing (10000*6)		$60,000.00
Absorption Costing Net Income (Loss)	-$12,000.00	-$60,000.00