Hi, we are repairing wall before installing new surround. The drywall does not match flush to the tub lip. Do we just make it fit or leave it above the lip? Read some post that leave me confused about the 1/8 inch thing.

If the panels are stout enough you should be fine with a gap at the bottom.

Flimsy panels tend to get pushed in, without backing, breaking the caulk seal.

If it's a good grade panel, you can glue it without the problem of having a backer like drywall going all the way down.

(It is not recommended to have the drywall all the way down because of water wicking up the sheet)

Hope this helps,
Ken

I agreer with (KBC) Good answer F.B.E.

What you need to do here is take a rasp and remove about an 1/8 or whatever the flange sticks out. Let the sheetrock slide down the flange but not all the way you can have a 1/4 gap between the edge of the sheetrock and top of the tup surround, this gap is covered when you apply sheetrock tape and mud,

When you apply your first coat of mud , let the tape rest on the surround , this will give you a clean line after you finish the other 2coats of mud