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	$	13
Variable manufacturing overhead	$	5
Variable selling and administrative	$	4
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 $54 per unit.

Required:

1. Assume the company uses variable costing:

a. Compute the unit product cost for year 1 and year 2.

Year 1 __________

Year 2 __________

b. Prepare an income statement for year 1 and year 2.
	Walsh Company Income Statement Year 1 Year 2 Variable expenses Total variable expenses Fixed expenses Total fixed expenses

2. Assume the company uses absorption costing:

a. Compute the unit product cost for year 1 and year 2. (Round your answers to 2 decimal places.)

Year 1_____________

Year 2 _____________

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

	Walsh Company Income Statement Year 1 Year 2 Net operating income (loss)

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

	Year 1	Year 2
Variable Costing Net Operating income (loss)
Absorption Costing Net operating income (loss)

Answer 1

	Using Variable Costing:
	Unit Cost	Year 1	Year 2
	Direct Material	27.00	27.00				Year 1	Year 2
	Direct Labor	13.00	13.00			Opening Units	0	10000
	Variable MOH	5.00	5.00			Units Produced	50000	40000
						Total	50000	50000
	Total	45.00	45.00			Less: Units Sold	40000	50000
						Closing Units	10000	0
	Walsh Company
	Income Statement
		Year 1	Year 2
	Sales	2160000	2700000
	Variable Expenses:
	Direct Material	1080000	1350000
	Direct Labor	520000	650000
	Variable MOH	200000	250000
	Variable S&A	160000	200000
	Total Variable Expense	1960000	2450000
	Contribution Margin	200000	250000
	Fixed Expenses:
	Manufacturing OH	400000	400000
	S&A Expenses	90000	90000
	Total Fixed Expenses	490000	490000
	Net Operating Income	-290000	-240000
	Using Absorption Costing:
	Unit Cost	Year 1	Year 2
	Direct Material	27.00	27.00
	Direct Labor	13.00	13.00			Fixed MOH PU:	Year 1	Year 2
	Variable MOH	5.00	5.00			Manufacturing OH	400000	400000
	Fixed MOH	8.00	10.00			Units Produced	50000	40000
	Total	53.00	55.00			Fixed MOH PU:	8.00	10.00
	Walsh Company
	Income Statement
		Year 1	Year 2
	Sales	2160000	2700000
	Less: Cost of Goods Sold:
	Opening Inventory	0	530000			53*10000
	Add: Cost of Goods Manuafacturing	2650000	2200000		53*50000	55*40000
	Cost of Goods Available for Sales	2650000	2730000
	Less: Closing Inventory	530000	0		53*10000
	Cost of Goods Sold	2120000	2730000
	Gross Profit	40000	-30000
	Less: Marketing & Admin Expense
	Variable	160000	200000
	Fixed OH	90000	90000
	Net Operating Income	-210000	-320000
		Year 1	Year 2
	Variable Costing NOI	-290000	-240000
	Fixed Cost of Closing Invenry(10000*8)	80000	-80000
	Absorption Costing NOI	-210000	-320000