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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 $ 22 direct labor $ 14 variable manufacturing overhead $ 4 variable selling and administrative $ 3 fixed costs per year: fixed manufacturing overhead $ 400,000 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 $51 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.

1 a. Year 1 unit product cost = 45      Year 2 unit product cost = 45 Notes: Unit product cost = Direct materials + direct labor + Variable manufacturing overhead = 25 + 15 + 5 = 45 units 1 b.                        Income statement                                                      Year 1           Year 2 Sales                                         2,400,000    3,000,000 (40000*60); (50000*60) Less: Variable cost of goods sold     1,800,000     2,250,000     Variable selling and adm.          80,000         100,000 Contribution margin                520,000        650,000 Less: Fixed manufacturing overhead  250,000      250,000     Fixed selling & adm expense      80,000         80,000 Net income                                  $190,000     $320,000 2 a.  Notes                                                              Year 1   Year 2
Direct materials                                      25     25
Direct labor                                              15     15
Variable manufacturing overhead         5         5
Fixed manufacturing overhead             5      6.25 (250,000/50,000); (250,000/40000) Unit product cost                                    50    51.25 b.                                 Income statement
Year 1         Year 2
Sales                                   2400000    3000000 Less: cost of goods sold   2000000    2550000
Gross margin                      400,000     450,000 Less: Selling and                160,000 180,000 administrative expense   Net income                         240,000     270,000 Workings Cost of goods sold for year 2 = (10,000* 50) + (40000 * 51.25) = 500,000 + 2,050,000 = 25,500,000 3. Reconciliation                                Year 1          Year 2
Variable costing net operating        190,000      320,000 income (loss)     Add: Deferred fixed overhead          50,000 in ending inventory (10000*5)   Less: Fixed overhead realized                             -50,000 in beginning inventory(10000*5)
Absorption costing net operating   $240,000    270,000 income (loss)

1) Cost per Unit                          Variable method Direct Material                                  $26  Direct labor                                     $16   Variable Overhead                          $3   Fixed Costs Per unit                         –     Total Unit Cost                                $45 for both years b) Income statement Variable Costing        Year 1                   Year 2 Sales (81* units sold)                                     $3,240,000      $4,050,000 Cost of goods sold :                                     $1,800,000      $2,250,000 opening (unit cost * opening units)              $0                     $450,000 Produced                                                      $2,250,000      $1,800,000 Closing                                                      –  $450,000         -$0 COGS                                                          =$1,800,000        $2,250,000 Variable selling and Admin cost             $80,000                 $100,000 Contribution Margin                                $1,360,000             $1,700,000 Minus Fixed Costs: Manufacturing costs                               $320,000               $320,000 Selling and Admin costs                         $90,000                  $90,000 Net Income                                             $950,000                $1,290,000 2 a)Cost per Unit                             Absorption method Direct Material                                   $26  Direct labor                                      $16 Variable Overhead                            $3 Fixed Costs Per unit                          $6.4 Total Unit Cost                                  $51.40 fot Both Years b) Income statement Absorption method    Year 1                Year 2 Sales (81* units sold)                                     $3,240,000      $4,050,000 COGS ( $51.40 * units sold)                         -$2,056,000    -$2,570,000 Gross profit                                                    $1,184,000       $1,480,000 Minus Non Manufacturing costs Variable selling and Admin cost                   $80,000           $100,000 Fixed Selling and Admin cost                       $90,000           $90,000 Net income                                                    $1,014,000        $1,290,000 3 ) Reconciliation of profits Net income under Variable                                                      $950,000 Add: Deferred Fixed cost on closing units (6.40*10000)       $64,000 Net income Absorption                                                            $1,014,000 Explanation: Cost per Unit                          Variable method     Absorption method Direct Material                                  $26                        $26  Direct labor                                     $16                          $16 Variable Overhead                          $3                            $3 Fixed Costs Per unit                         –                              $6.4 Total Unit Cost                                $45                          $51.40 Units schedule                                 Year 1                  Year 2 opening Units                                    0                          10,000 Produced                                        50,000                   40,000 Available for sale                           50,000                   50,000 Closing                                           -10,000                       0 Sold                                                 40,000                    50,000

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

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: Task 1: Assume the company uses variable costing: a. Compute the unit product cost for Year 1 and Year 2. Solution: Under variable costing, only variable costs are included to calculate the unit cost. We will consider the following costs: Direct materialDirect laborVariable manufacturing overheads1b. Prepare an income statement for Year 1 and Year 2: 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 Task 2: Assume the company uses absorption costing: 2a. Compute the unit product cost for Year 1 and Year 2. Unit product cost under absorption costing: Year 1: $42 Year 2: $43 2b. Prepare an income statement for Year 1 and Year 2. Year 1: Profit: $500,000 Year 2: Profit: $590,000 Task 3: Reconcile the difference between variable costing and absorption costing net operating income in Year 1. Reconciliation is attached

Walsh company A. Assume Variable Costing a. Unit Product Costing Direct materials $ 25 Add: Direct labor $ 15 Add: Variable manufacturing overhead $ 5 Total Variable costs per unit = $45 Year 1 product costs = $45 x 50,000 = $2,250,000 Year 2 product costs = $45 x 40,000 = $1,800,000 b.i. Income statement for Year 1. Sales = $60 x 40,000 = $2,400,000 Less Cost of Sales = $45 x 40,000 = -$1,800,000 Gross Margin = $600,000 Less Fixed Costs: Fixed Manufacturing Overhead = -$250,000 Fixed Selling & Admin expense = -$80,000 Less Variable selling & Admin Expenses ($2 x 40,000) = -$80,000 Net income (Year 1) = $190,000 b.ii. Income statement for Year 2. Sales = $60 x 50,000 = $3,000,000 Less Cost of Sales = $45 x 50,000 = -$2,250,000 Gross Margin = $750,000 Less Fixed Costs: Fixed Manufacturing Overhead = -$250,000 Fixed Selling & Admin expense = -$80,000 Less Variable selling & Admin Expenses ($2 x 50,000) = -$100,000 Net income (Year 2) = $320,000 B. Assume Absorption Costing Unit Product Cost Year 1. Fixed Manufacturing Costs + Variable Manufacturing Costs = $250,000 + ($45 x 50,000) = $2,500,000 Cost Per Unit = $2,500,000 divided by 50,000 = $50 Year 2. Fixed Manufacturing Costs + Variable Manufacturing Costs = $250,000 + ($45 x 40,000) = $2,050,000 Cost Per Unit = $2,050,000 divided by 40,000 = $51.25 b.i. Income statement for Year 1. Sales = $60 x 40,000 = $2,400,000 Less Cost of Sales = $50 x 40,000 = -$2,000,000 Gross Margin = $400,000 Less: Fixed Selling & Admin expense = -$80,000 Less Variable selling & Admin Expenses ($2 x 40,000) = -$80,000 Net income (Year 1) = $240,000 b.ii. Income statement for Year 2. Sales = $60 x 50,000 = $3,000,000 Less Cost of Sales = $51.25 x 50,000 = -$2,562,500 Gross Margin = $437,500 Less: Fixed Selling & Admin expense = -$80,000 Less Variable selling & Admin Expenses ($2 x 50,000) = -$100,000 Net income (Year 2) = $257,500 C. Year 1 (Net Income) Variable costing = $190,000 absorption Costing = $240,000 Difference = $50,000 Comment: difference is driven by production volumes exceeding sales Volume. This makes absorbed costs per unit drop under the absorption costing technique Year 2 (Net Income) Variable costing = $320,000 absorption Costing = $257,500 Difference = $62,500 Comment: difference is driven by lower production volume compared to sales, resulting in higher product cost per unit under the Absorption Costing technique Explanation: Walsh Company The Absorption Costing and Variable Costing are 2 methods of costs allocation to Products sold by businesses. The Absorption costing identifies all costs identifiable to production (both Variable and Fixed) and apportions these based on drivers. The eventual costs in a case of a single product business is the addition of the Fixed and Variable costs Variable Costing on the other hand recognises only the Variable elements of Costs in its product Costing. It completely eliminated Fixed Costs in assigning Product costs. In this wise, Gross Margin under the Variable costing approach will be higher. However both will deliver same Net Profit, as the Fixed Costs under Variable Costing will be recognized as an overhead costs against Gross Margin if production and sales Volume are the same.

What our team says

Walsh company manufactures and sells one product. the following information pertains to each of the company’s first two years of

In the future, many businesses may find that they need to outsource copywriting services to help them create high-quality content for their website and marketing materials. Walsh company, for example, produces and sells one product. In the first two years of its existence, it incurred costs of $10,000 in advertising and marketing expenses. Copywriting accounted for $2,000 of this total. Now consider the following: If Walsh company had hired a copywriter to write all of its content, it would have incurred an additional cost of $8,000 in payroll (for a total of $12,000) and $2,000 in overhead (for a total of $4,000). Copywriting would have accounted for 60% ($4,000) of the total expenses incurred in the first two years of the company’s existence.

Company Overview

Walsh Company manufactures and sells one product. In their first two years of business, Walsh has seen positive growth in sales and profits. The company attributes their success to the quality of their product, which they believe gives them an edge over their competition.

In 2013, Walsh Company produced and sold 1,000 units of their product. This year, the company is projecting to sell 2,000 units of their product. The president of Walsh Company believes that this growth is due in part to the company’s continued focus on quality and innovation.

The president of Walsh Company also believes that it is important to continuously develop new marketing strategies in order to keep up with the competition. He notes that new technologies are also playing a role in the company’s success.

Product Line

Walsh Company manufactures and sells one product: a clamp. The following information pertains to each of the company’s first two years of operations.

In 2014, the company produced 2,000 clamps. In 2015, Walsh produced 3,000 clamps.

The average price of a clamp was $5.00 in 2014 and $6.50 in 2015.

Sales and Marketing Strategies

In its first two years, Walsh Company manufactured and sold one product- a hand towel. The company’s marketing strategy was to focus on word-of-mouth recommendations from customers and distributors. They also used print and online advertisements to promote the towel.

Production and Manufacturing Processes

In Walsh company’s first two years, it manufactures and sells one product – a water filter. In order to produce this product, the company must adhere to certain manufacturing processes.

The process begins with sourcing raw materials (water and filters) from reputable suppliers. Next, the company thoroughly tests each filter before production in order to ensure quality and consistency. Once the filters are produced, they are packaged and delivered to customers.

Overall, Walsh company’s manufacturing process is rigorous and error-free – a testament to their dedication to quality products.

Financial Analysis

Walsh Company manufactures and sells one product. Walsh Company has been in business for two years. In those two years, the company has generated sales of $200,000. The company has also incurred expenses of $150,000 and incurred a net loss of $50,000.

The following table provides information about Walsh Company’s cash flow:

The above information indicates that the company had negative cash flow in both of its first two years in business. This suggests that the company will likely need to raise additional capital in order to continue operations.