Question

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During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Sales @ $61 per unit) Cost of goods sold (@ $32 per unit) Gross margin Selling and administrative expenses Net operating income Year 1 $ 1,220,000 640,000 580,000 305,000 275,000 Year 2 $ 1,830,000 960,000 870,000 335,000 $ 535,000 *$3 per unit variable: $245,000 fixed each year. The company's $32 unit product cost is computed as follows: $ Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($425,000 - 25,000 units) Absorption costing unit product cost 5 9 1 17 $ 32 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 25,000 20,000 Year 2 25,000 30,000 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

Year 2 Requirement: 1 Calculation of Unit cost Under Variable Costing Year 1 Direct Material 5.00 Direct Labor 9.00 Variable Manufacturing Overhead 1.00 Unit Cost 15.00 Year 2 5.00 9.00 1.00 15.00 Requirement: 3 3. Reconcile the variable costing and absorption costing Net income Year 1 Variable Costing Net Operating Income 190000 620000 Add: Fixed Manufacturing over head in ending inventory 85000 Less: Fixed Manufacturing over head in beginning inventory -85000 Absorption costing income (Loss) 275000 535000 Requirement: 2 Heatson company Variable Costing Income Statement Year 1 1220000 Year 2 1830000 Sales Variable Expense: Variable cost of goods sold Variable Selling and Administrative Expense Total Varible Expenses Contribution Magin Fixed Expenses : Fixed manufacturing Overheads Fixed Selling and Administrative Expenses Total fixed Expenses Net Operating Income or loss 300000 60000 3600001 860000 450000 90000 540000 1290000 425000 245000 670000 190000 425000 245000 670000 620000