Exercise 4-9 (Static) Variable and Absorption Costing Unit Product Costs and Income Statements [LO4-1, LO4-2, LO4-3]

Walsh Company manufactures and sells one product. The following information pertains to each of the companys 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 companys 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. Reconcile the difference between variable costing and absorption costing net operating income in Year 1.

Assume the company uses variable costing. Compute the unit product cost 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	$40,000	$50,000
Variable cost of goods sold
Variable selling and administrative
Fixed manufacturing overhead
Total fixed expenses	0	0
Contribution margin	40,000	50,000
	0	0

Assume the company uses absorption costing. 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	$50.00	$51.25

Assume the company uses absorption costing. 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
Sales	$2,400,000	$3,000,000
Cost of goods sold	2,000,000	2,550,000
Gross margin	400,000	450,000
Selling and administrative expenses	160,000	180,000
Net operating income (loss)	$240,000	$270,000

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)	$190,000	$320,000
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing	50,000
Less: Fixed manufacturing overhead cost deferred in inventory under absorption costing		50,000
Absorption costing net operating income	$240,000	$270,000

	Year 1	Year 2
Unit product cost	$45	$45