Question

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:
Year 1 Year 2
Sales (@ $60 per unit) $ 960,000 $ 1,560,000
Cost of goods sold (@ $44 per unit) 704,000 1,144,000
Gross margin 256,000 416,000
Selling and administrative expenses* 303,000 333,000
Net operating income $ -47,000 $ 83,000

* $3 per unit variable; $255,000 fixed each year.

The company’s $44 unit product cost is computed as follows:
Direct materials $ 9
Direct labor 13
Variable manufacturing overhead 3
Fixed manufacturing overhead ($399,000 ÷ 21,000 units) 19
Absorption costing unit product cost $ 44
Production and cost data for the first two years of operations are:
Year 1 Year 2
Units produced 21,000 21,000
Units sold 16,000 26,000
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 Material Cost (21000*9)	189,000	189,000
	Direct Labour Cost (21000*13)	273,000	273,000
	Variable manufacturing Overhead (21000*3)	63,000	63,000
	Total Production Cost	525,000	525,000
	Unit produce	21000	21000
	Unit Product cost	25	25
2		Year 1	Year 2
	Sales @ 60 per Unit	960,000	1,560,000
	Product cost @ 25 Per Unit	400,000	650,000
	Fixed Manufacturing OH	399,000	399,000
	Varaible Selling & Administrion OH	48,000	78,000
	Fixed Selling & Administrion OH	255,000	255,000
	Net Operating Income	- 142,000	178,000
3	Reconclilation
		Year 1	year 2
	Variable Costin Net Income	- 142,000	178,000
	Fixed Manufactuing Overhead Expenses With variable Costing	654,000	654,000
	Less: Fixed Manufacturing Cost with absorption Costing	559,000	749,000
	Diffrence	95,000	-95,000
	Absorption Costing net income	-47,000	83,000