Variable and Absorption Costing Unit Product Costs and Income Statements [LO6–1,

Question

Variable and Absorption Costing Unit Product Costs and Income Statements [LO6–1, LO6–2, LO6–3] 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. 3. Explain the difference between variable costing and absorption costing net operating income in Year 1. Also, explain why the two net operating income figures differ in Year 2.

Explanation / Answer

1. the company uses variable costing:

a. the unit product cost for both Year 1 and Year 2 = $45 per unit

b. Prepare an income statement for Year 1 and Year 2:

600000

Less: Fixed costs:

2. the company uses absorption costing:

a. the unit product cost for Year 1 = $51.60 per unit

and Year 2= $ 53.25 per unit

b. Prepare an income statement for Year 1 and Year 2:

600000

254000

3. the difference between variable costing and absorption costing net operating income in Year 1 = 190000 - 256000 = - 66000. Variable costing only considers the variable to value the closing stock and absorb all fixed cost to calculate the Net operating income. Whereas the absorption costing, it do not distinguish between the variable and fixed costs. Absorption costing is having higher profit because fixed cost has been shifted to year 2 through Closing Stock Inventory.

In the year 2, the two net operating income figures differs by 320000 - 254000 = 66000. The reason of difference is that in variable costing the fixed cost has been absorbed in the same year and not carried forward through Closing stock as it is valued at variable cost only. Where as in absorption costing, the operating profit is less because first years fixed cost has been transferred to the year 2 through the closing stock inventory which are sold in year 2.

Particulars Units Units Production units 50000 40000 Sold units 40000 50000 Per unit $ Total Year 1 $ Total Year 2 $ Sales 60 2400000 3000000 Less: Variable Cost Direct Material cost 25 1000000 1250000 Labor cost 15

600000

750000 Variable manufacturing overhead 5 200000 250000 Unit Cost 45 Variable selling and adminis overhead 2 80000 100000 47 1880000 2350000 Contribution 13 520000 650000

Less: Fixed costs:

Fixed Manufacturing Overhead 250000 Fixed Selling and Adminis Overhead 80000 330000 330000 Net Operating Income 190000 320000

Related Questions

Navigate

• Browse (All)
• Browse V
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.