Walsh Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations:

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	$	16
Variable manufacturing overhead	$	6
Variable selling and administrative	$	5
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
Fixed selling and administrative expenses	$	80,000

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 $56 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.

Explanation

1-a.

Under variable costing, only the variable manufacturing costs are included in product costs.

	Year 1		Year 2
Direct materials	$	25	$	25
Direct labor		16		16
Variable manufacturing overhead		6		6
Variable costing unit product cost	$	47	$	47

Note that selling and administrative expenses are not treated as product costs; that is, they are not included in the costs that are inventoried. These expenses are always treated as period costs.

1-b.

Variable cost of goods sold

Year 1 ($47 per unit × 40,000 units) = $1,880,000

Year 2 ($47 per unit × 50,000 units) = $2,350,000

Variable selling and administrative

Year 1 ($5 per unit × 40,000 units) = $200,000

Year 2 ($5 per unit × 50,000 units) = $250,000

2-a. 

The unit product costs under absorption costing:

	Year 1		Year 2
Direct materials	$	25.00	$	25.00
Direct labor		16.00		16.00
Variable manufacturing overhead		6.00		6.00
Fixed manufacturing overhead		*6.40		**8.00
Absorption costing unit product cost	$	53.40	$	55.00

Fixed manufacturing overhead

*$320,000 ÷ 50,000 units = $6.40 per unit.

**$320,000 ÷ 40,000 units = $8.00 per unit.

2-b.

Cost of goods sold

Year 1 (40,000 units × $53.40 per unit) = $2,136,000

Year 2 (40,000 units × $55.00 per unit) + (10,000 units × $53.40 per unit) = $2,734,000

3.

Fixed overhead deferred

Year 1 (10,000 units × $6.40 per unit) = $64,000

Fixed overhead released

Year 2 (10,000 units × $6.40 per unit) = $(64,000)

Thanks