Chapter 6, Problem 9E

EXERCISE 6-9 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 company's first two years of operations:

Variable costs per unit 
Manufacturing:
  Direct materials											   $25
Direct labor											   $15
Variable manufacturing overhead 								     $5
Variable selling and administrative								     $2
Fixed costs per year 
Fixed manufacturing overhead 								          $250,000
Fixed selling and administrative expenses							   $80,000

Required:

1. Assume the company uses variable costing:
1. Compute the unit product cost for Year 1 and Year 2.
2. Prepare an income statement for Year 1 and Year 2.
2. Assume the company uses absorption costing:

1. Compute the unit product cost for Year 1 and Year 2.
2. Prepare an income statement for Year 1 and Year 2.

Explain the difference between variable costing and absorption costing net operating income in Year 1.Also, explain why the two net operating incomes differ in Year 2.