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)	$	1,054,000		$	1,674,000
Cost of goods sold (@ $38 per unit)		646,000			1,026,000
Gross margin		408,000			648,000
Selling and administrative expenses*		300,000			330,000
Net operating income	$	108,000		$	318,000

* $3 per unit variable; $249,000 fixed each year.

The company’s $38 unit product cost is computed as follows:

Direct materials	$	6
Direct labor		11
Variable manufacturing overhead		3
Fixed manufacturing overhead ($396,000 ÷ 22,000 units)		18
Absorption costing unit product cost	$	38

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	22,000	22,000
Units sold	17,000	27,000

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.

Production and cost data for the first two years of operations are: Units produced Units sold Year 1 22,000 17,000 Year 2 22,000 27,000 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

1) unit product cost under variable costing				year 1	year 2
direct material				6	6
direct labor				11	11
variable manufacturing overhead				3	3
unit product cost				20	20
2) Income statement under variable costing
				year 1	year 2
sale @62				1054000	1674000
less: variable cost
variable cost of goods sold@20				340000	540000
variable selling & administrative exp@3				51000	81000
Total variable cost				391000	621000
contribution margin				663000	1053000
less: fixed cost
fixed manufacturing overhead				396000	396000
fixed selling & administrative expenses				249000	249000
total fixed cost				645000	645000
net operating income				18000	408000
3)Reconciliation				year 1	year 2
variable costing operating income(loss)				18000	408000
add: fixed manufacturing overhead cost (18* 5000)				90000
less: fixed manufacturing overhead cost					90000
absorption costing net operating income				108000	318000