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Answer:
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 = $62,500
Comment: difference is driven by lower production volume compared to sales, resulting in higher product cost per unit under the Absorption Costing technique
Explanation:
Walsh Company
The Absorption Costing and Variable Costing are 2 methods of costs allocation to Products sold by businesses.
The Absorption costing identifies all costs identifiable to production (both Variable and Fixed) and apportions these based on drivers.
The eventual costs in a case of a single product business is the addition of the Fixed and Variable costs
Variable Costing on the other hand recognises only the Variable elements of Costs in its product Costing. It completely eliminated Fixed Costs in assigning Product costs.
In this wise, Gross Margin under the Variable costing approach will be higher. However both will deliver same Net Profit, as the Fixed Costs under Variable Costing will be recognized as an overhead costs against Gross Margin if production and sales Volume are the same.
Operation is termed as the management of the work in the firm according to the efficiency and effectiveness of the tasks performed.
The stage from the production of the firm to the selling and distribution of the firm, the company incurs the channels and the communication process and that is the operation that needs to be maintained in the firm.
Walsh company
A. Assume Variable Costing
a. Unit Product Costing
Direct materials =$ 25
Add: Direct labor= $ 15
Add: Variable manufacturing overhead =$ 5
Total Variable costs per unit = $45
[tex]\text{Year 1: product costs} = \$45 \times 50,000 = \$2,250,000[/tex]
[tex]\text{Year 2: product costs} = \$45 \times40,000 = \$1,800,000[/tex]
b.i. Income statement for Year 1.
[tex]\text{Sales} = \$60 \times 40,000 = \$2,400,000[/tex]
[tex]\text{Less Cost of Sales} = \$45 \times 40,000 = -\$1,800,000[/tex]
Gross Margin = $600,000
Less Fixed Costs:
Fixed Manufacturing Overhead = -$250,000
Fixed Selling & Admin expense = -$80,000
[tex]\text{Less Variable selling & Admin Expenses}= (\$2 \times 40,000) = -\$80,000[/tex]
Net income (Year 1) = $190,000
b.ii. Income statement for Year 2.
[tex]\text{Sales} = \$60 \times 50,000 = \$3,000,000[/tex]
[tex]\text{Less Cost of Sales} = \$45 \times50,000 = -\$2,250,000[/tex]
Gross Margin = $750,000
Less Fixed Costs:
Fixed Manufacturing Overhead = -$250,000
Fixed Selling & Admin expense = -$80,000
[tex]\text{Less Variable selling & Admin Expenses}= (\$2 \times 50,000) = -\$100,000[/tex]
Net income (Year 2) = $320,000
B. Assume Absorption Costing
Unit Product Cost
Year 1.
[tex]\text{Fixed Manufacturing Costs + Variable Manufacturing Costs} = \$250,000 + (\$45 \times 50,000) = \$2,500,000[/tex]
[tex]\begin{aligned}\text{Cost Per Unit} = \frac{\$2500000}{50000} =\$50\end{aligned}[/tex]
Year 2.
[tex]\text{Fixed Manufacturing Costs + Variable Manufacturing Costs} = \$250,000 + (\$45 \times 40,000) = \$2,050,000[/tex]
[tex]\begin{aligned}\text{Cost Per Unit} = \frac{\$2050000}{40000} =\$51.25\end{aligned}[/tex]
b.i. Income statement for Year 1.
[tex]\text{Sales} = \$60 \times 40,000 = \$2,400,000[/tex]
[tex]\text{Less Cost of Sales} = \$50 \times 40,000 = -\$2,000,000[/tex]
Gross Margin = $400,000
Less: Fixed Selling & Admin expense = -$80,000
[tex]\text{Less Variable selling & Admin Expenses}= (\$2 \times 40,000) = -\$80,000[/tex]
Net income (Year 1) = $240,000
b.ii. Income statement for Year 2.
[tex]\text{Sales} = \$60 \times 50,000 = \$3,000,000[/tex]
[tex]\text{Less Cost of Sales} = \$51.25 \times 50,000 = -\$2,562,500[/tex]
Gross Margin = $437,500
Less: Fixed Selling & Admin expense = -$80,000
[tex]\text{Less Variable selling & Admin Expenses} (\$2 \times 50,000) = -\$100,000[/tex]
Net income (Year 2) = $257,500
C. Year 1 (Net Income)
Variable costing = $190,000
absorption Costing = $240,000
Difference = $50,000
The difference has been arisen 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
The difference has been occurred because of the lower production volume compared to sales, resulting in higher product cost per unit under the Absorption Costing technique
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