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 $ 26 Direct labor $ 16 Variable manufacturing overhead $ 3 Variable selling and administrative $ 2 Fixed costs per year: Fixed manufacturing overhead $ 320,000 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 $81 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

Answer:

1) Cost per Unit                          Variable method

Direct Material                                  $26

 Direct labor                                     $16  

Variable Overhead                          $3  

Fixed Costs Per unit                         -    

Total Unit Cost                                $45 for both years

b) Income statement Variable Costing        Year 1                   Year 2

Sales (81* units sold)                                     $3,240,000      $4,050,000

Cost of goods sold :                                     $1,800,000      $2,250,000

opening (unit cost * opening units)              $0                     $450,000

Produced                                                      $2,250,000      $1,800,000

Closing                                                      -  $450,000         -$0

COGS                                                          =$1,800,000        $2,250,000

Variable selling and Admin cost             $80,000                 $100,000

Contribution Margin                                $1,360,000             $1,700,000

Minus Fixed Costs:

Manufacturing costs                               $320,000               $320,000

Selling and Admin costs                         $90,000                  $90,000

Net Income                                             $950,000                $1,290,000

2 a)Cost per Unit                             Absorption method

Direct Material                                   $26

 Direct labor                                      $16

Variable Overhead                            $3

Fixed Costs Per unit                          $6.4

Total Unit Cost                                  $51.40 fot Both Years

b) Income statement Absorption method    Year 1                Year 2

Sales (81* units sold)                                     $3,240,000      $4,050,000

COGS ( $51.40 * units sold)                         -$2,056,000    -$2,570,000

Gross profit                                                    $1,184,000       $1,480,000

Minus Non Manufacturing costs

Variable selling and Admin cost                   $80,000           $100,000

Fixed Selling and Admin cost                       $90,000           $90,000

Net income                                                    $1,014,000        $1,290,000

3 ) Reconciliation of profits

Net income under Variable                                                      $950,000

Add: Deferred Fixed cost on closing units (6.40*10000)       $64,000

Net income Absorption                                                            $1,014,000

Explanation:

Cost per Unit                          Variable method     Absorption method

Direct Material                                  $26                        $26

 Direct labor                                     $16                          $16

Variable Overhead                          $3                            $3

Fixed Costs Per unit                         -                              $6.4

Total Unit Cost                                $45                          $51.40

Units schedule                                 Year 1                  Year 2

opening Units                                    0                          10,000

Produced                                        50,000                   40,000

Available for sale                           50,000                   50,000

Closing                                           -10,000                       0

Sold                                                 40,000                    50,000