Exercise 6-9 (Algo) Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2, LO6-3]

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	$ 21
Direct labor	$ 17
Variable manufacturing overhead	$ 3
Variable selling and administrative	$ 2
Fixed costs per year:
Fixed manufacturing overhead	$ 320,000
Fixed selling and administrative expenses	$ 100,000

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 $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.

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.

Exercise 6-12 (Algo) Variable Costing Income Statement; Reconciliation [LO6-2, LO6-3]

Whitman Company has just completed its first year of operations. The companys absorption costing income statement for the year follows:

Whitman Company Income Statement
Sales (41,000 units $43.60 per unit)	$ 1,787,600
Cost of goods sold (41,000 units $20 per unit)	820,000
Gross margin	967,600
Selling and administrative expenses	430,500
Net operating income	$ 537,100

The companys selling and administrative expenses consist of $307,500 per year in fixed expenses and $3 per unit sold in variable expenses. The $20 unit product cost given above is computed as follows:

Direct materials	$ 10
Direct labor	3
Variable manufacturing overhead	2
Fixed manufacturing overhead ($265,000 53,000 units)	5
Absorption costing unit product cost	$ 20

Required:

1. Redo the companys income statement in the contribution format using variable costing.

2. Reconcile any difference between the net operating income on your variable costing income statement and the net operating income on the absorption costing income statement above.