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) $ 930,000 $ 1,550,000 Cost of goods sold (@ $35 per unit) 525,000 875,000 Gross margin 405,000 675,000 Selling and administrative expenses* 293,000 323,000 Net operating income $ \112,000\ $ 352,000 * $3 per unit variable; $248,000 fixed each year. The company’s $35 unit product cost is computed as follows: Direct materials $ 7 Direct labor 9 Variable manufacturing overhead 3 Fixed manufacturing overhead ($320,000 ÷ 20,000 units) 16 Absorption costing unit product cost $ 35 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 operatons are: Year 1 Year 2 Units produced 20,000 20,000 Units sold 15,000 25,000 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

1
	Year 1	Year 2
Direct materials	7	7
Direct labor	9	9
Variable manufacturing overhead	3	3
Unit product cost	19	19
Unit product cost = 19
2
	Year 1	Year 2
Sales	930000	1550000
Variable expenses:
Variable cost of goods sold	285000	475000
Variable selling and administrative expenses	45000	75000
Total Variable expenses	330000	550000
Contribution margin	600000	1000000
Fixed expenses:
Fixed manufacturing overhead	320000	320000
Fixed selling and administrative expenses	248000	248000
Total Fixed expenses	568000	568000
Net operating income	32000	432000
3
	Year 1	Year 2
Variable costing net operating income	32000	432000
Add: fixed manufacturing overhead deferred in inventory under absorption costing	80000		=5000*16
Deduct: fixed manufacturing overhead released from inventory under absorption costing		(80000)
Absorption costing net operating income	112000	352000