# Reconcile the difference between variable costing and absorption costing

3. Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2 (This question goes with Question 1, but wouldn’t paste beneath it)

Question 1:
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 \$ 25
Direct labor \$ 15
Variable selling and administrative \$ 2
Fixed costs per year:
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 \$60 per unit.

b.
Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places.)

Question #2:

During Heaton Company’s first two years of operations, the company reported absorption costing net operating income as follows:

Year 1 Year 2
Sales (@ \$25 per unit) \$ 1,000,000 \$ 1,250,000
Cost of goods sold (@ \$18 per unit) 720,000 900,000

Gross margin 280,000 350,000
Selling and administrative expenses* 210,000 230,000

Net operating income \$ 70,000 \$ 120,000

* \$2 per unit variable; \$130,000 fixed each year.

The company’s \$18 unit product cost is computed as follows:

Direct materials \$ 4
Direct labor 7
Fixed manufacturing overhead (\$270,000 ÷ 45,000 units) 6

Absorption costing unit product cost \$ 18

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the two years are:

Year 1 Year 2
Units produced 45,000 45,000
Units sold 40,000 50,000

Required:
1.
Prepare a variable costing contribution format income statement for each year.

2.
Reconcile the absorption costing and the variable costing net operating income figures for each year.

Question 3:
Denton Company manufactures and sells a single product. Cost data for the product are given below:

Variable costs per unit:
Direct materials \$7
Direct labor 10

Total variable cost per unit \$25

Fixed costs per month:

Total fixed cost per month \$ 560,000

The product sells for \$60 per unit. Production and sales data for July and August, the first two months of operations, follow:

Units
Produced Units
Sold
July 17,500 15,000
August 17,500 20,000

The company’s Accounting Department has prepared absorption costing income statements for July and August as presented below:

July August
Sales \$ 900,000 \$ 1,200,000
Cost of goods sold 600,000 800,000

Gross margin 300,000 400,000
Selling and administrative expenses 290,000 305,000

Net operating income \$ 10,000 \$ 95,000

Required:
1.
Determine the unit product cost under absorption costing and variable costing.

2.

Prepare contribution format variable costing income statements for July and August.

3.
Reconcile the variable costing and absorption costing net operating income figures.

Pages (550 words)
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