Question

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Sales (@ $61 per unit) Cost of goods sold (@ $31 per unit) Gross margin Selling and administrative expenses Net operating income Year 1 $ 1,098,000 558,000 540,000 303,000 $ 1237,000 Year 2 $1,708,000 868,000 840,000 333,000 $ 507,000 *$3 per unit variable: $249,000 fixed each year. The company's $31 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($276,000 = 23,000 units) Absorption costing unit product cost 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 first two years of operations are: Units produced Units sold Year 1 23,000 18,000 Year 2 23,000 28,000 Required: 1. Using variable costing, what is the unit product cost for both years? 2. What is the variable costing net operating income in Year 1 and in Year 2? 3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Answer 1

Requirement: 1 Calculation of Unit cost Under Variable Costing Year 1 Direct Material 5.00 Direct Labor 10.00 Variable Manufacturing Overhead 4.00 Unit Cost 19.00 Year 2 5.00 10.00 4.00 19.00 Requirement: 2 Heatson company Variable Costing Income Statement Year 1 1098000 Year 2 1708000 342000 54000 396000 Sales ( @61Per unit) Variable Expense: Variable cost of goods sold (@19) Variable Selling and Administrative Expense (@3) Total Varible Expenses Contribution Magin Fixed Expenses : Fixed manufacturing Overheads Fixed Selling and Administrative Expenses Total fixed Expenses Net Operating Income or loss 532000 840001 616000 1092000 702000 276000 249000 525000 177000 276000 249000 525000 567000

Requirement: 3 Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Net Operating Income 177000 567000 Add: Fixed over head in ending inventory 60000 Less: Fixed over head in beginning inventory -60000 Absorption Costing Net Operating Income or loss 237000 507000