Question

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Sales (@ $60 per unit) Cost of goods sold (@ $43 per unit) Gross margin Selling and administrative expenses* Net operating income Year 1 $ 1,080,000 774,000 306,000 299,000 $ 7,000 Year 2 $1,680,000 1,204,000 476,000 329,000 $ 147,000 * $3 per unit variable; $245,000 fixed each year. The company's $43 unit product cost is computed as follows: 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: 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

1
	Year 1	Year 2
Direct materials	10	10
Direct labor	10	10
Variable manufacturing overhead	5	5
Unit product cost	25	25
Unit product cost = $25
2
	Year 1	Year 2
Sales	1080000	1680000
Variable expenses:
Variable cost of goods sold	450000	700000
Variable selling and administrative expenses	54000	84000
Total Variable expenses	504000	784000
Contribution margin	576000	896000
Fixed expenses:
Fixed manufacturing overhead	414000	414000
Fixed selling and administrative expenses	245000	245000
Total Fixed expenses	659000	659000
Net operating income (loss)	(83000)	237000
3
	Year 1	Year 2
Variable costing net operating income(loss)	(83000)	237000
Add: Fixed manufacturing overhead deferred in inventory under absorption costing	90000		=5000*18
Deduct: Fixed manufacturing overhead released from inventory under absorption costing		(90000)
Absorption costing net operating income	7000	147000