Walsh Company manufactures and sells one product The followi

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 $ 23 Direct labor $ 16 Variable manufacturing overhead $ 4 Variable selling and administrative $ 3 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 $56 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.

I cant follow this answer, please break it down better. Please resend this answer

Solution

Reconciliation:

The point of difference in operating income computed under Variable and Absorption costing methods lie in the treatment of ending inventory. Under variable costing, inventory doesn’t include fixed manufacturing cost whereas it is included under absorption costing system. As there was no ending inventory at the end of 2^nd year, there were no differences in the operating income either. This acts as a control check on the accuracy of the solution.

Ending inventory balance difference under 2 system: $494000 - $430000 = $64000

Operating income difference under these two systems: $94000 - $30000 = $64000