walsh company manufactures and sells one product. the following information pertains to each of the companys…

walsh company manufactures and sells one product. the following information pertains to each of the companys first two years of operations:\nvariable costs per unit:\nmanufacturing:\ndirect materials $30\ndirect labor $17\nvariable manufacturing overhead $4\nvariable selling and administrative $3\nfixed costs per year:\nfixed manufacturing overhead $400,000\nfixed 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 companys 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.\nrequired 1a required 1b required 2a required 2b required 3

walsh company manufactures and sells one product. the following information pertains to each of the companys first two years of operations:\nvariable costs per unit:\nmanufacturing:\ndirect materials $30\ndirect labor $17\nvariable manufacturing overhead $4\nvariable selling and administrative $3\nfixed costs per year:\nfixed manufacturing overhead $400,000\nfixed 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 companys 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.\nrequired 1a required 1b required 2a required 2b required 3

Answer

Answer:

1a. Variable Costing Unit Product Cost

Year 1

$30 + 17+4=51$

Year 2

$30 + 17+4=51$

1b. Variable - Costing Income Statements

Year 1

Sales ($59\times40,000)$: $2,360,000$ Variable cost of goods sold ($51\times40,000)$: $2,040,000$ Variable selling and administrative ($3\times40,000)$: $120,000$ Contribution margin: $2,360,000-(2,040,000 + 120,000)=200,000$ Fixed manufacturing overhead: $400,000$ Fixed selling and administrative expenses: $80,000$ Net operating income: $200,000-(400,000 + 80,000)= - 280,000$

Year 2

Sales ($59\times50,000)$: $2,950,000$ Variable cost of goods sold ($51\times50,000)$: $2,550,000$ Variable selling and administrative ($3\times50,000)$: $150,000$ Contribution margin: $2,950,000-(2,550,000+150,000)=250,000$ Fixed manufacturing overhead: $400,000$ Fixed selling and administrative expenses: $80,000$ Net operating income: $250,000-(400,000 + 80,000)= - 230,000$

2a. Absorption - Costing Unit Product Cost

Year 1

Fixed manufacturing overhead per unit $=\frac{400,000}{50,000}=8$ Unit product cost $=30 + 17+4 + 8=59$

Year 2

Fixed manufacturing overhead per unit $=\frac{400,000}{40,000}=10$ Unit product cost $=30 + 17+4+10 = 61$

2b. Absorption - Costing Income Statements

Year 1

Sales ($59\times40,000)$: $2,360,000$ Cost of goods sold ($59\times40,000)$: $2,360,000$ Gross margin: $2,360,000 - 2,360,000=0$ Selling and administrative expenses ($3\times40,000+80,000)$: $200,000$ Net operating income: $0 - 200,000=-200,000$

Year 2

Sales ($59\times50,000)$: $2,950,000$ Cost of goods sold ($59\times10,000+61\times40,000)$: $2,950,000$ Gross margin: $2,950,000 - 2,950,000=0$ Selling and administrative expenses ($3\times50,000+80,000)$: $230,000$ Net operating income: $0 - 230,000=-230,000$

3. Reconciliation of Net Operating Income

Year 1

Difference in net - operating income $=-200,000-(-280,000)=80,000$ Under variable costing, fixed manufacturing overhead is expensed in full in the period it is incurred. Under absorption costing, fixed manufacturing overhead is included in inventory cost. In Year 1, production ($50,000$ units) is greater than sales ($40,000$ units). The fixed manufacturing overhead cost of the 10,000 units in ending inventory ($8\times10,000 = 80,000$) is deferred in inventory under absorption costing, which makes absorption - costing net operating income $80,000$ higher than variable - costing net operating income.

Explanation:

Step1: Calculate variable - costing unit product cost

Variable costing includes only variable manufacturing costs. So we sum direct materials, direct labor, and variable manufacturing overhead for both years. $30 + 17+4$

Step2: Prepare variable - costing income statements

First, calculate sales revenue by multiplying selling price per unit by number of units sold. Then calculate variable cost of goods sold and variable selling and administrative expenses. Subtract these from sales to get contribution margin. Finally, subtract fixed costs to get net operating income.

Step3: Calculate absorption - costing unit product cost

For each year, divide fixed manufacturing overhead by number of units produced to get fixed manufacturing overhead per unit. Then add it to variable manufacturing costs to get unit product cost.

Step4: Prepare absorption - costing income statements

Calculate cost of goods sold based on units sold and unit product cost. Subtract cost of goods sold from sales to get gross margin. Then subtract selling and administrative expenses to get net operating income.

Step5: Reconcile net operating income

Find the difference between absorption - costing and variable - costing net operating income. Explain the difference based on the fact that fixed manufacturing overhead is treated differently under the two costing methods.