Question

During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: Sales (@ $63 per unit) Cost of goods sold (@ $39 per unit) Gross margin Selling and administrative expenses Net operating income Year 1 $1,071,000 663,000 408,000 305,000 $ 103,000 Year 2 $ 1,701,000 1,053,000 648,000 335,000 $ 313,000 * $3 per unit variable; $254,000 fixed each year. The company's $39 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 $ 6 11 4 18 $ 39 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 two years are: Units produced Units sold Year 1 22,000 17,000 Year 2 22,000 27,000

Answer 1

Solution to Requirement 1 :

Heaton Company
Variable Costing Income Statement
Particulars	Year 1	Year 2
Sales Value (A)	$ 10,71,000	$ 17,01,000
Less :Variable expenses
Variable cost of goods sold ($ 21)	$ 3,57,000 (17,000 units * $ 21)	$ 5,67,000 (27,000 units *$ 21)
Variable Selling and Administrative expense ($ 3)	$ 51,000 (17,000 units * $ 3)	$ 81,000 (27,000 units*$ 3)
Total variable expense (B)	($ 4,08,000) ($ 3,57,000 +$ 51,000)	($ 6,48,000) ($ 5,67,000 +$ 81,000)
Contribution margin (C) (Sales – Total variable expense )	$ 6,63,000 ($ 10,71,000 - $ 4,08,000)	$ 10,53,000 ($ 17,01,000 -$ 6,48,000)
Fixed expenses
Fixed manufacturing overheads	$ 3,96,000	$ 3,96,000
Fixed selling and administrative expenses	$ 2,54,000	$ 2,54,000
Total fixed Expenses (D)	($ 6,50,000) ($ 3,96,000 +$ 2,54,000)	($ 6,50,000) ($ 3,96,000 +$ 2,54,000)
Net operating income or (loss) [ E] ( Contribution margin –Fixed expenses)	$ 13,000 ($ 6,63,000 - $ 6,50,000)	$ 4,03,000 ($ 10,53,000 - $ 6,50,000)

WORKING NOTES :

Calculation of unit cost under variable costing :

Particulars	Year 1	Year 2
Direct material	$ 6	$ 6
Direct labor	$ 11	$ 11
Variable manufacturing overhead	$ 4	$ 4
Unit cost	$ 21 ($ 6+$ 11+$ 4)	$ 21 ($ 6+$11+$ 4)

SOLUTION TO REQUIREMENT 2 :

Reconciliation of Variable costing and Absorption costing Net Operating Incomes (Losses)
Particulars	Year 1	Year 2
Variable cost Net operating income	$ 13,000	$ 4,03,000
Add: Fixed manufacturing overhead deferred in ending inventory	$ 90,000 (5,000 units *$ 18)	-
Less : Fixed manufacturing overhead released in beginning inventory	-	($ 90,000) (5,000 units *$ 18)
Absorption costing Net operating Income (Loss)	$ 1,03,000	$ 3,13,000

WORKING NOTES :

Units reconciliation :

Particulars	Year 1	Year 2
Units in Beginning inventory	-	5,000 units
Add :Units produced	22,000 units	22,000 units
Total units available for sale	22,000 units	27,000 units
Less: Units sold	(17,000 units)	(27,000 units )
Units in Ending inventory	5000 units	Nil

THANKYOU !!!!!