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 $ 10 Variable manufacturing overhead $ 2 Variable selling and administrative $ 1 Fixed costs per year: Fixed manufacturing overhead $ 240,000 Fixed selling and administrative expenses $ 80,000 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 $51 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.

Answer 1

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.)

	Year 1	Year 2
Direct material	27	27
Direct labour	10	10
Variable manufacturing overhead	2	2
Fixed manufacturing overhead	4.80	6
Total unit product cost	43.80	45

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

	Year 1	Year 2
Sales	2040000	2550000
Cost of goods sold	(1752000)	(2250000)
Gross profit	288000	300000
Selling and administrative expense	(120000)	(130000)
Net operating income	168000	170000

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

	Year 1	Year 2
Absorption costing income statement	168000	170000
Fixed manufacturing overhead cost in ending inventory	-48000	60000
Variable costing net operating income	120000	230000