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 ($38 per unit) Gross margin Selling and administrative expenses Net operating income Year 1 1,140,000 722,000 418,000 386,00 226,000 Year 2 1,740,000 1,102,000 638,000 336,000 476,000 *$3 per unit variable: $249,000 fixed each year, The company's $38 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead (5480,000 Absorption costing unit product cost 24,000 units) 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 24,000 19,000 a Year 2 24,000 Units produced Units sold s 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 22 3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Answer 1

ANSWERS Variable Costing Units cost 1 Units Product Cost 18 Year 2 Variable Costing Unit cost and Net Operating income Year 1 2 Net Operating Income 12000 402000 Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Income(Loss) Add: Fixed Manufacturing Overheads cost Deferred in inventory LESS: Fixed Manufacturing Overheads cost released From inventory Absorption Costing Income(loss) 12000 402000 100000 -100000 112000 302000 Working Note -1 Year 2 Year 1 Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads = (Difference in units * fixed manufacturing OH per unit) 24000 24000 19000 29000 5000 -5000 1,00,000 -100000

1. Calculation of Unit cost Under Variable Costing Year 1 Year 2 Direct Material Direct Labour Variable Manufacturing Overhead Unit Product Cost 5.0 5.0 9.0 9.0 4.0 4.0 18.00 18.00 Income Statement Under Variable Costing Year 1 Year 2 Sales (@60) Variable Expense Variable Cost Of Goods Sold (@18) Variable Selling and Administrative Expense (@3) Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads Fixed Sellingand Administrative Expenses Total fixed Expenses 1140000 1740000 522000 342000 57000 87000 399000 609000 741000 1131000 480000 480000 249000 249000 729000 729000 Net Operating Income 12000 402000