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 bold ( $38 per unit) Gross margin Selling and administrative expenses Net operating income Year 1 $1,098,000 684,000 414,000 308,000 $\106,000 Year 2 $1,700,000 1,064,000 644,000 338,000 $ 306,000 *$3 per unit variable: $254.000 fixed each year. The company's $38 unit product cost is computed as follows: 12 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($414,000 + 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: Year 1 Year 2 Units produced 23,000 23,000 Units sold 18,000 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. Complete this question by entering your answers in the tabs below. Required Required Required 23 Using variable costing, what is the unit product cost for both years? Unit product cost

Answer 1

Requirement: 1 Calculation of Unit cost Under Variable Costing Year 1 Direct Material 6.00 Direct Labor 12.00 Variable Manufacturing Overhead 2.00 Unit Cost 20.00 Year 2 6.00 12.00 2.00 20.00 Requirement: 2 Heatson company Variable Costing Income Statement Year 1 1098000 Year 2 1708000 Sales ( @61Per unit) Variable Expense: Variable cost of goods sold (@20) 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 360000 540001 414000 684000 560000 84000 644000 1064000 414000 254000 668000 16000 414000 254000 668000 396000

Requirement: 3 Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Net Operating Income 16000 396000 Add: Fixed over head in ending inventory 90000 Less: Fixed over head in beginning inventory -90000 Absorption Costing Net Operating Income or loss 106000 306000