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 $ 24 Direct labor $ 10 Variable manufacturing overhead $ 3 Variable selling and administrative $ 2 Fixed costs per year: Fixed manufacturing overhead $ 240,000 Fixed selling and administrative expenses $ 60,000 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 $58 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.

Task 1(a): Unit product cost:

Year 1: $37

Year 2: $37

Task 1(b):

Net income in year 1: $460,000

Net income in year 2: $650,000

Task 2(a):

Unit product cost under absorption costing:

Year 1: $42

Year 2: $43

Task 2(b):

Year 1: Profit: $500,000

Year 2: Profit: $590,000

Task 3:

Reconciliation is attached

Explanation:

Assume the company uses variable costing:

Solution:

Under variable costing, only variable costs are included to calculate the unit cost.

We will consider the following costs:

Under variable costing, an income statement considers, variable cost as product cost and all fixed costs are considered as period cost.

Key matrix:

Contribution in year 1: $760,000

Contribution in year 2: $950,000

Net income in year 1: $460,000

Net income in year 2: $650,000

Assume the company uses absorption costing:

Unit product cost under absorption costing:

Year 1: $42

Year 2: $43

Year 1: Profit: $500,000

Year 2: Profit: $590,000

Reconcile the difference between variable costing and absorption costing net operating income in Year 1.

Reconciliation is attached

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