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 15
Variable manufacturing overhead 5
Variable selling and administrative 2
Fixed costs per year:
Fixed manufacturing overhead $250,000
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 $60 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.

Solution:

Step 1:

To measure the sage unit cost of the year of a commodity, plan the statement below:

Details                                                                       Year 1          Year 2

Direct materials per unit                                              $25              $25

Add: Direct labour per unit                                             $15              $15

Add: Variable manufacturing overhead per unit         $5               $5

Total product cost per unit                                            $45            $45  

Thus, the unit product cost under variable costing for yea 1 and year 2 is $45  

Step 2:

                       Variable costing income statement

                      For the year ended year 1 and year 2

Details                                                                       Year 1          Year 2

Unit sold (a)                                                             40,000        50,000

Sales [ b=a x 60 each ]                                         2,400,000   3,000,000

Variable product cost [c=a*45 each]                   1,800,000    2,250,000

Variable selling and administrative costs

[d=a*$2]                                                                 80,000          1,00,000

Contribution margin [e=b-c-d]                             520,000          650,000

Fixed manufacturing overhead [f]                       250,000         250,000

Fixed selling and administrative expense [g]     80,000           80,000

Net operating income [e-f-g]                             $190,000      $320,000

Step 3:

Details                                                                  Year 1          Year 2

Direct materials per unit                                       $25              $25

Add: Direct labour per unit                                   $15               $15

Add: Variable manufacturing overhead per unit   $5              $5

Add: Fixed manufacturing overhead per unit

       Year - 1 - ($250,000 + 50,000 units)

       Year - 1 - ($250,000 + 40,000 units)               $5             $6

Total product cost per unit                                 $50.00          $51.25  

Step 4:

                      Absorption Costing Income Statement

                     For the years ended Year 1 and Year 2  

Details                                                               Year 1        Year 2

Number of units produced [a]                       50000       40000

Units sold [b]                                                   40000        50000

Sales [c = b x $60 each]                            $2400000   $3000000

Cost of goods sold:

Beginning inventory [d]

Year - 1 - No Beginning inventory

Year - 2 - (10,000 units x $50.00 each)              $0        $500,000

Cost of goods manufactured [e]

Year - 1 - (a x $50.00 each)                        $2,500,000

Year - 2 - (a x $51.25 each)                                              $2,050,000

Ending inventory [f]

Year - 1 - (10,000 units x $50.00 each)         $500,000

Year - 2 - No Ending inventory                           $ -                    $ -

Cost of goods sold [g = d + e - f]                 $2000000    $2550000

Gross margin [h = c - g]                               $400,000      $450,000

Selling and administrative expenses [i]

[(b x $2 each) + $80,000]                           $160,000           $180000

Net operating income [h- i]                         $240000          $270000  

Step 5:

                        Reconciliation of Net Operating Income  

Details                                                                     Year 1          Year 2

Net operating income as per variable costing    $190,000    $320,000

Add/(Less): Difference in valuation of inventory due to fixed manufacturing overhead

Year - 1 - [(50,000 units - 40,000 units) x $5.00 each]

Year - 2 - [(50,000 units - 40.000 units) x $5.00 each] $50000 $(50000)

Net operating income as per absorption costing   $240000    $270000  

                     Reconciliation of Net Operating Income  

Details                                                                     Year 1        Year 2

Net operating income as per variable costing   $190,000  $320,000

Add (Less): Difference in valuation of inventory due to fixed manufacturing overhead

Year - 1 - [(50,000 units - 40,000 units) x $5.00 each]

Year - 2 - [(50,000 units - 40.000 units) x $5.00 each] $50000 $ (50000)

Net operating income as per absorption costing   $240000    $270,000  

e would be the answer