Question

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Year 1 $ 1,140,000 741,000 399,000 307,000 Year 2 Sales (e $60 per unit) Cost of goods sold ( $39 per unit) Gross margin Selling and administrative expenses $1,740,000 1,131,000 609,000 337,000 Net operating income 92,000 272,000 $3 per unit variable; $250,000 fixed each year The company's $39 unit product cost is computed as follows Direct materials $ 10 13 Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($336,000 24,000 units) Absorption costing unit product cost 14 $ 39 Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges or production equipment and buildings Production and cost data for the first two years of operations are: Year 1 Year 2 Units produced Units sold 24,000 19,000 24,000 29,000 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

Requirement: 1 Calculation of Unit cost Under Variable Costing Year 1 Direct Material 10.00 Direct Labor 13.00 Variable Manufacturing Overhead 2.00 Unit Cost 25.00 Year 2 10.00 13.00 2.000 25.00 Requirement: 2 Heatson company Variable Costing Income Statement Year 1 1140000 Year 2 1740000 Sales ( @60Per unit) Variable Expense: Variable cost of goods sold (@25) 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 475000 57000 532000 608000 725000 87000 812000 9280001 336000 250000 586000 22000 336000 250000 586000 342000

Requirement: 3 Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Net Operating Income 22000342000 Add(Deduct) Fixed Manufacturing Overheads cost Deferred in (released From) inventory 70000 -70000 Absorption Costing Net Operating Income or loss 92000 272000