Question

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	$	28
Direct labor	$	15
Variable manufacturing overhead	$	3
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
Fixed selling and administrative expenses	$	50,000

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 $57 per unit.

Required:

1. Assume the company uses variable costing:

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

Assume the company uses variable costing. Prepare an income statement for Year 1 and Year 2.

	Walsh Company Income Statement Year 1 Year 2 Sales Variable expenses: 1 2 3 4 Total variable expenses 0 0 5 0 0 Fixed expenses: 6 7 8 9 10 0 0 Net operating income (loss) $0 $0

a. Options Under Variable Expenses (1-4):

-Accounts Payable, Accounts Receivable, Cash, Variable Cost of Goods Sold, Variable Selling and Administrative (**note there are 4 boxes but not all may be used**)

b. Options Under Total Variable Expenses (5):

-Contribution Margin or Gross Margin

c. Options Under Fixed Expenses (6-10):

-Accounts Payable, Accounts Receivable, Cash, Fixed Manufacturing Overhead, Fixed Selling and Administrative Expense (**note there are 4 boxes but not all may be used**)

2. Assume the company uses absorption costing:

a. Compute the unit product cost for Year 1 and Year 2. (Round your answer to 2 decimal places.)

	Year 1 Year 2 Unit product cost

b. Prepare an income statement for Year 1 and Year 2. (Round your intermediate calculations to 2 decimal places.)

	Walsh Company Income Statement Year 1 Year 2 1 2 3 4 Net Operating Income (Loss) $0 $0

a. Options for Boxes 1-2:

-Advertising, Beginning Merchandise Inventory, Commission, Cost of Goods Sold, Depreciation, Direct Labor, Direct Materials, Ending Merchandise Inventory, Fixed Manufacturing Overhead, Fixed Selling and Administrative Expenses, Indirect Labor, Indirect Materials, Manufacturing Overhead, Purchases, Sales, Selling and Administrative Expenses, Variable Manufacturing Overhead, Variable Selling and Administrative Expenses

b. Options for Box 3:

-Contribution Margin or Gross Margin

c. Options for Box 4:

-Advertising, Beginning Merchandise Inventory, Commission, Depreciation, Ending Merchandise Inventory, Fixed Manufacturing Overhead, Indirect Labor, Indirect Materials, Purchases, Sales, Selling and Administrative Expenses, Variable Cost of Goods Sold

3. Reconcile the difference between variable costing and absorption costing net operating income in Year 1. (Enter any losses or deductions as a negative value.)

	Year 1 Year 2 Variable costing net operating income (loss) 1 2 Absorption costing net operating income (loss)

a. Options for Box 1:

-Add: Fixed Manufacturing Overhead Cost Deferred in Inventory Under Absorption Costing, Add: Fixed Manufacturing Overhead Cost Released from Inventory under Absorption Costing, Deduct: Fixed Manufacturing Overhead Cost Deferred in Inventory Under Absorption Costing, Deduct: Fixed Manufacturing Overhead Cost Released from Inventory Under Absorption Costing

b. Options for Box 2:

-Fixed Manufacturing Overhead Cost Deferred in Inventory Under Absorption Costing, Add: Fixed Manufacturing Overhead Cost Released from Inventory under Absorption Costing, Deduct: Fixed Manufacturing Overhead Cost Deferred in Inventory Under Absorption Costing, Deduct: Fixed Manufacturing Overhead Cost Released from Inventory Under Absorption Costing

Answer 1