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	$	25
Direct labor	$	12
Variable manufacturing overhead	$	2
Variable selling and administrative	$	1
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

	unit product cost
a.					Year 1	Year 2
	unit product cost				39	39
	notes
	Direct materials					25
	direct labor					12
	Variable manufacturing overhead					2
	unit product cost					39
b.		income statement
					year 1	year 2
	Sales	(40000*51);(50000*51)			2040000	2550000
	Variable expenses
	Variable cost of goods sold				1560000	1950000
	Variable selling and adm				40000	50000
	total variable expense				1600000	2000000
	Contribution margin				440000	550000
	Fixed expense
	Fixed manufacturing overhead				400,000	400,000
	Fixed selling & adm expense				90,000	90,000
	total fixed expense				490,000	490,000
	Net income				-50,000	60,000
2)	unit product cost
a)					Year 1	Year 2
	unit product cost				47	49
	notes					year 1	year 2
	Direct materials					25	25
	direct labor					12	12
	Variable manufacturing overhead					2	2
	FMOH (400,000/50,000)….(400,000/40000)					8	10
	unit product cost					47	49
b)		income statement
					year 1	year 2
	Sales				2040000	2550000
	cost of goods sold				1880000	2430000
	Gross margin				160000	120000
	Selling and administrative expense				130,000	140,000
	Net income				30,000	-20000
	cost of goods sold for year 2 (10,000*47+40000*49)
3)	Reconcilaition						year 1	year 2
	Variable costing net operating income (loss)						-50,000	60,000
	add:Deferrred fixed overhead in ending inventory (10000*8)						80,000
	less:Fixed overhead realeased in beginning inventory(10000*8)							-80,000
	Absoption costing net operatin income (loss)						30,000	-20,000