Question

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

	Year 1			Year 2
Sales (@ $62 per unit)	$	1,116,000		$	1,736,000
Cost of goods sold (@ $42 per unit)		756,000			1,176,000
Gross margin		360,000			560,000
Selling and administrative expenses*		305,000			335,000
Net operating income	$	\55,000\		$	225,000

* $3 per unit variable; $251,000 fixed each year.

The company’s $42 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		13
Variable manufacturing overhead		5
Fixed manufacturing overhead ($391,000 ÷ 23,000 units)		17
Absorption costing unit product cost	$	42

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.
Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the variable costing net operating income in Year 1 and in Year 2? (Loss amounts should be indicated with a minus sign.) Year 1 Year 2 Net operating income (loss) Required 1 Required 3 >

Answer 1

Requirement: 1 Calculation of Unit cost Under Variable Costing Year 1 Year 2 Direct Material 7.00 7.00 Direct Labor 13.00 13.00 Variable Manufacturing Overhead Unit Cost 5.00 5.00 25.00 25.00 Requirement: 2 Heatson company Variable Costing Income Statement Year 1 Year 2 Sales (@62Per 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 1116000 1736000 450000 700000 54000 84000 504000 784000 952000 612000 391000 391000 251000 251000 642000 642000 310000 -30000

Requirement: 3 Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Net Operating Income Add: Fixed over head in ending inventory Less: Fixed over head in beginning inventory Absorption Costing Net Operating Income or loss -30000 310000 85000 -85000 55000 225000