Question

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Sales (@ $63 per unit) Cost of goods sold (@ $37 per unit) Gross margin Selling and administrative expenses* Net operating income Year 1 $ 1,071,000 629,000 442,000 305,000 $ \137,000 Year 2 $ 1,701,000 999,000 702,000 335,000 $ 367,000 * $3 per unit variable; $254,000 fixed each year. The company's $37 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($374,000 + 22,000 units) Absorption costing unit product cost $ 37 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 22,000 17,000 Year 2 22,000 27,000 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.

Can you please provide complete work/steps to solve requirements 1--3 for this problem?? Thank you!

Answer 1

Requirement: 1 Calculation of Unit cost Under Variable Costing Year 1 Direct Material 7.00 Direct Labor 9.00 Variable Manufacturing Overhead 4.00 Unit Cost 20.00 Year 2 7.00 9.00 4.00 20.00 Requirement: 2 Heatson company Variable Costing Income Statement Year 1 1071000 Year 2 1701000 Sales ( @63Per 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 340000 51000 391000 680000 540000 81000 621000 1080000 374000 254000 628000 52000 374000 254000 628000 452000

Requirement: 3 Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Net Operating Income 52000 452000 Add(Deduct) Fixed Manufacturing Overheads cost Deferred in (released From) inventory 85000 -85000 Absorption Costing Net Operating Income or loss 137000 367000