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.

Answer 1

• All working forms part of the answer
• Requirement 1

--Under variable costing, unit cost of product only includes Variable MANUFACTURING cost.

--Answer : Part ‘a’

	Year 1	Year 2
Direct Material	$                                           25.00	$                           25.00
Direct Labor	$                                           12.00	$                           12.00
Manufacturing Overhead	$                                              2.00	$                             2.00
Unit Product cost	$                                           39.00	$                           39.00

--Answer: Part ‘b’

	Year 1	Year 2
Sales revenue	$     2,040,000.00	$ 2,550,000.00
Variable costs:
Direct Material	$     1,000,000.00	$ 1,250,000.00
Direct Labor	$        480,000.00	$      600,000.00
Manufacturing Overhead	$           80,000.00	$      100,000.00
Variable selling & admin	$           40,000.00	$        50,000.00
Total variable cost	$     1,600,000.00	$ 2,000,000.00
Contribution margin	$        440,000.00	$      550,000.00
Fixed Costs:
Fixed manufacturing overhead	$        400,000.00	$      400,000.00
Fixed selling & admin	$           90,000.00	$        90,000.00
Total Fixed Cost	$        490,000.00	$      490,000.00
Net Income	$        (50,000.00)	$        60,000.00

• Requirement 2

--Under Absorption costing, FIXED MANUFACTURING cost also becomes part of unit product cost and is applied to unit sold.

--Working and Answer: Part ‘a’

Working		Year 1	Year 2
A	Fixed Manufacturing Overhead	$                                 400,000.00	$                400,000.00
B	No. of units produced	50,000	40,000
C = A/B	Fixed manufacturing overhead per unit	$                                              8.00	$                           10.00
	Variable manufacturing cost per unit:
D	Direct Material	$                                           25.00	$                           25.00
E	Direct Labor	$                                           12.00	$                           12.00
F	Manufacturing Overhead	$                                              2.00	$                             2.00
G = C+D+E+F	Unit Product cost	$                                           47.00	$                           49.00

--Answer: Part ‘b’

	Year 1	Year 2
Sales revenue	$                             2,040,000.00	$            2,550,000.00
Cost of Goods Sold:
Beginning Inventory	$                                                  -	$                470,000.00
Cost of manufacturing	$                             2,350,000.00 [40000 x $47]	$            1,960,000.00 [50000 x $49]
Cost of ending inventory	$                              (470,000.00)	$                                  -
Cost of Goods Sold	$                             1,880,000.00	$            2,430,000.00
Gross Profits	$                                 160,000.00	$                120,000.00
Operating expenses:
Variable selling & admin	$                                   40,000.00	$                  50,000.00
Fixed selling & admin	$                                   90,000.00	$                  90,000.00
Total Operating expenses	$                                 130,000.00	$                140,000.00
Net Income	$                                   30,000.00	$                (20,000.00)