Question

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Sales (@ $62 per unit) Cost of goods sold (@ $33 per unit) Gross margin Selling and administrative expenses Net operating income Year 1 $ 1,178,000 627,000 551,000 311,000 $ 240,000 Year 2 $ 1,798,000 957,000 841,000 341,000 $ 500,000 *$3 per unit variable; $254,000 fixed each year. The company's $33 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($384,000 + 24,000 units) Absorption costing unit product cost awwu 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 24,000 19,000 Year 2 24,000 29,000

Answer 1

Requirement: 1 Calculation of Unit cost Under Variable Costing Year 1 Direct Material 5.00 Direct Labor 9.00 Variable Manufacturing Overhead 3.00 Unit Cost 17.00 Year 2 5.00 9.00 3.00 17.00 Requirement: 2 Heatson company Variable Costing Income Statement Year 1 Year 2 11780001798000 Sales (@62Per unit) Variable Expense: Variable cost of goods sold (@17) 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 323000 57000 380000 798000 493000 87000 580000 1218000 384000 254000 638000 160000 384000 2540001 638000 580000

Requirement: 3 Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Net Operating Income 160000 580000 Add: Fixed over head in ending inventory 80000 Less: Fixed over head in beginning inventory -80000 Absorption Costing Net Operating Income or loss 240000 500000