walsh company manufactures and sells one product. the following information pertains to each of the…
walsh company manufactures and sells one product. the following information pertains to each of the company’s first two years of operations:\nvariable costs per unit:\n manufacturing:\n direct materials $30\n direct labor $17\n variable manufacturing overhead $4\n variable selling and administrative $3\nfixed costs per year:\n fixed manufacturing overhead $400,000\n fixed selling and administrative expenses $80,000\nduring 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 $59 per unit.\nrequired:\n1. assume the company uses variable costing:\n a. compute the unit product cost for year 1 and year 2.\n b. prepare an income statement for year 1 and year 2.\n2. assume the company uses absorption costing:\n a. compute the unit product cost for year 1 and year 2.\n b. prepare an income statement for year 1 and year 2.\n3. reconcile the difference between variable costing and absorption costing net operating income in year 1.\ncomplete this question by entering your answers in the tabs below.
Answer
Explanation:
Step1: Calculate unit product cost under variable costing
Under variable costing, unit product cost = Direct materials + Direct labor+ Variable manufacturing overhead. For both Year 1 and Year 2, unit product cost = $30 + 17+4=$51$.
Step2: Prepare income statement under variable costing for Year 1
Sales ($59\times40000$) = $2360000$. Variable cost of goods sold ($51\times40000$) = $2040000$. Variable selling and administrative expenses ($3\times40000$) = $120000$. Contribution margin = $2360000-(2040000 + 120000)=200000$. Fixed manufacturing overhead = $400000$. Fixed selling and administrative expenses = $80000$. Net operating income = $200000-(400000 + 80000)= - 280000$.
Step3: Prepare income statement under variable costing for Year 2
Sales ($59\times50000$) = $2950000$. Variable cost of goods sold ($51\times50000$) = $2550000$. Variable selling and administrative expenses ($3\times50000$) = $150000$. Contribution margin = $2950000-(2550000+150000)=250000$. Fixed manufacturing overhead = $400000$. Fixed selling and administrative expenses = $80000$. Net operating income = $250000-(400000 + 80000)= - 230000$.
Step4: Calculate unit product cost under absorption costing for Year 1
Unit fixed manufacturing overhead in Year 1 ($400000\div50000$) = $8$. Unit product cost = $51+8=$59$.
Step5: Calculate unit product cost under absorption costing for Year 2
Unit fixed manufacturing overhead in Year 2 ($400000\div40000$) = $10$. Unit product cost = $51 + 10=$61$.
Step6: Prepare income statement under absorption costing for Year 1
Sales ($59\times40000$) = $2360000$. Cost of goods sold ($59\times40000$) = $2360000$. Gross margin = $2360000 - 2360000=0$. Variable selling and administrative expenses ($3\times40000$) = $120000$. Fixed selling and administrative expenses = $80000$. Net operating income = $0-(120000 + 80000)= - 200000$.
Step7: Prepare income statement under absorption costing for Year 2
Sales ($59\times50000$) = $2950000$. Cost of goods sold: From beginning inventory ($59\times10000$) = $590000$. From current - year production ($61\times40000$) = $2440000$. Total cost of goods sold ($590000+2440000$) = $3030000$. Gross margin = $2950000 - 3030000=-80000$. Variable selling and administrative expenses ($3\times50000$) = $150000$. Fixed selling and administrative expenses = $80000$. Net operating income = $-80000-(150000 + 80000)= - 310000$.
Step8: Reconcile the difference between variable and absorption costing net - operating income in Year 1
Under variable costing, net operating income = - $280000$. Under absorption costing, net operating income = - $200000$. The difference = $-200000-(-280000)=80000$. The difference is due to the fixed manufacturing overhead deferred in inventory under absorption costing. In Year 1, production ($50000$ units) is greater than sales ($40000$ units). The fixed manufacturing overhead per unit ($8$) for the 10000 units in ending inventory ($8\times10000 = 80000$) is deferred in inventory under absorption costing, which increases the net operating income under absorption costing compared to variable costing.
Answer:
a. Unit product cost under variable costing: Year 1 = $51$, Year 2 = $51$. b.
| Year | Variable Costing Income Statement | Amount ($) |
|---|---|---|
| 1 | Sales | 2360000 |
| Variable cost of goods sold | 2040000 | |
| Variable selling and administrative expenses | 120000 | |
| Contribution margin | 200000 | |
| Fixed manufacturing overhead | 400000 | |
| Fixed selling and administrative expenses | 80000 | |
| Net operating income | - 280000 | |
| 2 | Sales | 2950000 |
| Variable cost of goods sold | 2550000 | |
| Variable selling and administrative expenses | 150000 | |
| Contribution margin | 250000 | |
| Fixed manufacturing overhead | 400000 | |
| Fixed selling and administrative expenses | 80000 | |
| Net operating income | - 230000 |
a. Unit product cost under absorption costing: Year 1 = $59$, Year 2 = $61$. b.
| Year | Absorption Costing Income Statement | Amount ($) |
|---|---|---|
| 1 | Sales | 2360000 |
| Cost of goods sold | 2360000 | |
| Gross margin | 0 | |
| Variable selling and administrative expenses | 120000 | |
| Fixed selling and administrative expenses | 80000 | |
| Net operating income | - 200000 | |
| 2 | Sales | 2950000 |
| Cost of goods sold | 3030000 | |
| Gross margin | - 80000 | |
| Variable selling and administrative expenses | 150000 | |
| Fixed selling and administrative expenses | 80000 | |
| Net operating income | - 310000 |
- The difference in net - operating income between variable costing and absorption costing in Year 1 is $80000$. Absorption costing net - operating income is higher because of fixed manufacturing overhead deferred in inventory.