Question

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

	Year 1			Year 2
Sales (@ $63 per unit)	$	1,134,000		$	1,764,000
Cost of goods sold (@ $38 per unit)		684,000			1,064,000
Gross margin		450,000			700,000
Selling and administrative expenses*		307,000			337,000
Net operating income	$	143,000		$	363,000

* $3 per unit variable; $253,000 fixed each year.

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

Direct materials	$	9
Direct labor		12
Variable manufacturing overhead		3
Fixed manufacturing overhead ($322,000 ÷ 23,000 units)		14
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	23,000	23,000
Units sold	18,000	28,000

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

Solution to requirement 1: Calculation of unit cost under variable costing: Particulars Direct material Direct labor Variable manufacturing overhead Unit cost Year 1 Year 2 $9 $9 $12 $ 12 $3 $3 $24 $24 ($ 9+$ 12+$ 3) ($ 9+$ 12+$ 3)

Solution to Requirement 2: Year 2 $ 17,64,000 Heaton Company Variable Costing Income Statement Particulars Year 1 Sales Value (A) $ 11,34,000 Less:Variable expenses Variable cost of goods sold ($ 24) $4,32,000 (18,000 units * $ 24) Variable Selling and Administrative $ 54,000 expense ($3) (18,000 units * $3) Total variable expense (B) ($ 4,86,000) ($ 4,32,000 +$ 54,000) Contribution margin (C) $6,48,000 (Sales - Total variable expense) ($ 11,34,000 - $ 4,86,000) Fixed expenses Fixed manufacturing overheads $3,22,000 Fixed selling and administrative $ 2,53,000 expenses Totalfixed Expenses (D) ($ 5,75,000) ($ 3,22,000 +$ 2,53,000) Net operating income or (loss) [ E] $ 73,000 ( Contribution margin-Fixed expenses) ($ 6,48,000 - $5,75,000) $ 6,72,000 (28,000 units *$ 24) $ 84,000 (28,000 units" $ 3) ($ 7,56,000) ($ 6,72,000 +$ 84,000) $ 10,08,000 ($ 17,64,000 - $ 7,56,000) $3,22,000 $ 2,53,000 ($ 5,75,000) ($ 3,22,000 +$ 2,53,000 $ 4,33,000 ($ 10,08,000 - $ 5,75,000)

Requirement 3: Reconciliation of Variable costing and Absorption costing Net Operating Incomes (Losses) Particulars Year 1 Year 2 Variable cost Net operating $ 73,000 $ 4,33,000 income Add: Fixed manufacturing $70,000 overhead deferredin ending (5,000 units *$ 14) inventory Less: Fixed manufacturing ($ 70,000) overhead released in beginning (5,000 units *$ 14) inventory Absorption costing Net operating $ 1,43,000 $3,63,000 Income (Loss)

Units reconciliation :

Particulars	Year 1	Year 2
Units in Beginning inventory	-	5,000 units
Add :Units produced	23,000 units	23,000 units
Total units available for sale	23,000 units	28,000 units
Less: Units sold	(18,000 units)	(28,000 units )
Units in Ending inventory	5000 units	Nil

Thankyou !!!!!!