During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:
Year 1 | Year 2 | ||||
Sales (@ $63 per unit) | $ | 1,134,000 | $ | 1,764,000 | |
Cost of goods sold (@ $27 per unit) | 486,000 | 756,000 | |||
Gross margin | 648,000 | 1,008,000 | |||
Selling and administrative expenses* | 308,000 | 338,000 | |||
Net operating income | $ | \340,000\ | $ | 670,000 | |
* $3 per unit variable; $254,000 fixed each year.
The company’s $27 unit product cost is computed as follows:
Direct materials | $ | 5 |
Direct labor | 8 | |
Variable manufacturing overhead | 2 | |
Fixed manufacturing overhead ($276,000 ÷ 23,000 units) | 12 | |
Absorption costing unit product cost | $ | 27 |
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.
SOLUTION: 1 | ||||
Caclulation of Unit Cost of Production by using Variable Costing for both year | ||||
Particulars | Amount | |||
Cost per Unit | ||||
Direct Materials | $ 5.00 | |||
Direct Labor | $ 8.00 | |||
Variable Manufacturing overhead | $ 2.00 | |||
Total Manufacturing Variable Cost | $ 15.00 | |||
SOLUTION: 2 | ||||
VARIABLE COSTING INCOME STATEMENT | ||||
Year 1 | Year 2 | |||
Sales | $ 11,34,000 | $ 17,64,000 | ||
Less: Variable Cost of Goods Sold | $ 2,70,000 | $ 4,20,000 | ||
(18,000 X $ 15) | (28,000 X $ 15) | |||
Manufacturing Margin | $ 8,64,000 | $ 13,44,000 | ||
Less: Variable Sellign and administration expenses | $ 54,000 | $ 84,000 | ||
(18,000 X $ 3) | (28,000 X $ 3) | |||
Contribution margin | $ 8,10,000 | $ 12,60,000 | ||
Fixed Cost | ||||
Fixed Manufacturing Cost | $ 2,76,000 | $ 2,76,000 | ||
Fixed Selling and adminsitration expenses | $ 2,54,000 | $ 2,54,000 | ||
Total Fixed Cost | $ 5,30,000 | $ 5,30,000 | ||
Net Income | $ 2,80,000 | $ 7,30,000 | ||
SOLUTION: 3 | ||||
RECONCILIATION OF VARIABLE COSTING NET OPERATING INCOME FIGURE FOR EACH YEAR | ||||
YEAR 1 | YEAR 2 | |||
Variable costing net operating income (Loss) | $ 2,80,000 | $ 7,30,000 | ||
Add: Fixed manufacturing overhead deferred in closing inventory (5,000 Units X $ 12 Per unit) | $ 60,000 | |||
Less : Fixed manufacturing overhead deferred in Opening inventory (5,000 Units X $ 12 Per unit) | $ 60,000 | |||
Absorption costing net operating income | $ 3,40,000 | $ 6,70,000 | ||
During Heaton Company’s first two years of operations, it reported absorption costing net operating income as...
During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $63 per unit) $ 1,134,000 $ 1,764,000 Cost of goods sold (@ $38 per unit) 684,000 1,064,000 Gross margin 450,000 700,000 Selling and administrative expenses* 307,000 337,000 Net operating income $ 143,000 $ 363,000 * $3 per unit variable; $253,000 fixed each year. The company’s $38 unit product cost is computed as follows: Direct materials $ 9...
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During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $60 per unit) $ 1,080,000 $ 1,680,000 Cost of goods sold (@ $38 per unit) 684,000 1,064,000 Gross margin 396,000 616,000 Selling and administrative expenses* 302,000 332,000 Net operating income $ 94,000 $ 284,000 * $3 per unit variable; $248,000 fixed each year. The company’s $38 unit product cost is computed as follows: Direct materials $ 6 Direct...