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	$	22
Direct labor	$	17
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 $83 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.

Assume the company uses variable costing. Prepare an income statement for Year 1 and Year 2.

Reconcile the difference between variable costing and absorption costing net operating income in Year 1. (Enter any losses or deductions as a negative value. Round your intermediate calculations to 2 decimal places.)

	Year 1	Year 2
Variable costing net operating income (loss)	$1,070,000	$1,460,000
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing
Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing
Absorption costing net operating income (loss)

Walsh Company
Income Statement
	Year 1	Year 2
Sales	$3,320,000	$4,150,000
Variable expenses:
Variable cost of goods sold
Variable selling and administrative
Total variable expenses
Contribution margin
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative expense
Total fixed expenses
Net operating income (loss)

Answer 1