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	$	16
Variable manufacturing overhead	$	3
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	400,000
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 $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.

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

Compute the Variable costing Unit Product cost
				Year 1	Year 2
Direct Material			27	27
Direct labour			16	16
Variable Manufacturing overheads	3	3
Variable costing unit prroduct cost	46	46
Construct The Variable Costing Income Statement under FIFO
				YEAR 1	YEAR 2
Sales				20,40,000	25,50,000
Less: Variable cost
variable cost of goods sold		1840000	2300000
Variable selling expense		80,000	1,00,000
Total Variable cost			19,20,000	24,00,000
Contribution margin			1,20,000	1,50,000
Fixed expense:
Fixed Manufacturing overheads	4,00,000	4,00,000
Fixed selling expense		90,000	90,000
Total Fixed cost			4,90,000	4,90,000
Net operating Income		-3,70,000	-3,40,000
Construct The Absorption Costing Unit Product Cost
				Year-1	Year 2
Direct Material			27	27
Direct labour			16	16
Variable Manufacturing overheads	3	3
Fixed Manufacturing overheads		8.00	10.00
Absorption costing unit prroduct cost	54.00	56.00
Construct the Absorption Costing Income Statement Under FIFO
				Year 1	Year 2
Sales				$20,40,000	$25,50,000
Cost of Goods sold			2160000	2780000	(10000*54+40000*56)
Gross Margin			($1,20,000)	($2,30,000)
Selling and distribution expense		1,70,000	1,90,000
Net operating income		-2,90,000	-4,20,000
Reconciliation Statement
				Year -1
Net Income (loss) as per Variable costing	-370000
Add: Fixed Mfg oh deferred (10000*8)	80000
Net Income (loss) as per Absorption costing	-290000