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) Cost of goods sold ( $37 per unit) Gross margin Selling and administrative expenses $. 1,260,000 740,000 520,000 312,000 1,890,000 1,110,000 780,000 342,000 Net operating income $ 1208,000 438,000 "$3 per unit variable; $252,000 fixed each year. The company's $37 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($325,000 25,000 units) Absorption costing unit product cost 12 4 13 $ 37 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

Answer 1

1)	unit product cost under variable costing
	Direct materials				8
	direct labor				12
	variable manufacturing overhead				4
	unit product cost under variable costing				24
	for both years $24 is the unit product cost
2)		Heaton /company
	Varible costing income statement
					year 1	year 2
	Sales				1,260,000	1,890,000
	Variable expenses:
	Variable cost of goods sold				480000	720000
	Variable selling & adm expense				60000	90000
	total variable expense				540000	810000
	Contribution margin				720,000	1,080,000
	fixed expenses:
	fixed manufacturing overhead				325,000	325,000
	Fixed selling and adm expense				252,000	252,000
	total fixed expense				577,000	577,000
	net operating income				143,000	503,000

3)
	Reconcilation
						year 1	year 2
	Variable costing net income					143,000	503,000
	Add Fixed oh deferred in ending inventory					65,000
	less:fixed on released in ending invnetory						-65,000
	Absorption costing net income					208,000	438,000