Question

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 (@ $39 per unit) Gross margin Selling and administrative expenses* Net operating income Year 1 $ 1,098,000 702,000 396,000 307,000 89,000 Year 2 $1,708,000 1,092,000 616,000 337,000 $ 279,000 * $3 per unit variable; $253,000 fixed each year. The company's $39 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($437,000 + 23,000 units) Absorption costing unit product cost $ 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 first two years of operations are: Units produced Units sold Year 1 23,000 18,000 Year 2 23,000 28,000

Answer 1

Requirement: 1 Calculation of Unit cost Under Variable Costing Year 1 Direct Material 7.00 Direct Labor 9.00 Variable Manufacturing Overhead 4.00 Unit Cost 20.00 Year 2 7.00 9.00 4.00 20.00 Requirement: 2 Heatson company Variable Costing Income Statement Year 1 1098000 Year 2 1708000 Sales ( @61Per unit) Variable Expense: Variable cost of goods sold (@20) Variable Selling and Administrative Expense (@3) Total Varible Expenses Contribution Magin Fixed Expenses : Fixed manufacturing Overheads Fixed Selling and Administrative Expenses Total fixed Expenses Net Operating Income or loss 360000 54000 414000 684000 560000 84000 644000 1064000 437000 253000 690000 -6000 437000 253000 690000 374000

Requirement: 3 3. Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Net Operating Income -6000 374000 Add: Fixed Manufacturing over head in ending inventory 95000 Less: Fixed Manufacturing over head in beginning inventory -95000 Absorption costing income (Loss) 89000 279000