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 (@ $37 per unit) Gross margin Selling and administrative expenses* Net operating income Year 1 $ 1,020,000 629,000 391,000 297,000 $ 194,000 Year 2 $ 1,620,000 999,000 621,000 327,000 $ 294,000 *$3 per unit variable: $246,000 fixed each year. The company's $37 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($396,000 + 22,000 units) Absorption costing unit product cost 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: 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. cost for both and in Year 2? come figures for each year.

Answer 1

ANSWERS Variable Costing Unit cost and Net Operating income 1 Units Product Cost 2 Net Operating Income Year 1 Year 2 19 19 4000 384000 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 Maufacturing Overheads cost released From inventory Absorption Costing Income(loss) 4000 384000 90000 90000 94000 294000 Working Note -1 Year 1 Year 2 Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads Difference in units * fixed manufacturing OH per unit) 22000 22000 17000 27000 5000 -5000 90,000 90000

1. Calculation of Unit cost Under Variable Costing Year 1 Year 2 5.0 Direct Material Direct Labour Variable Manufacturing Overhead Unit Product Cost 5.0 11.0 11.0 3.0 3.0 19.00 19.00 Income Statement Under Variable Costing Year 1 Year 2 Sales (@60) Variable Expense Variable Cost Of Goods Sold (@19) Variable Selling and Administrative Expense (@3) Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads Fixed Sellingand Administrative Expenses Total fixed Expenses Net Operating Income 1020000 1620000 513000 323000 51000 81000 594000 374000 1026000 646000 396000 396000 246000 246000 642000 642000 4000 384000