Question

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

	Year 1			Year 2
Sales (@ $62 per unit)	$	930,000		$	1,550,000
Cost of goods sold (@ $37 per unit)		555,000			925,000
Gross margin		375,000			625,000
Selling and administrative expenses*		293,000			323,000
Net operating income	$	82,000		$	302,000

* $3 per unit variable; $248,000 fixed each year.

The company’s $37 unit product cost is computed as follows:

Direct materials	$	6
Direct labor		10
Variable manufacturing overhead		3
Fixed manufacturing overhead ($360,000 ÷ 20,000 units)		18
Absorption costing unit product cost	$	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:

	Year 1	Year 2
Units produced	20,000	20,000
Units sold	15,000	25,000

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.

particulars	year1($)	year2($)
direct material	6	6
direct labour	10	10
variable selling and administrative expenses	3	3
	19per unit	19p.u.

2.net operating income using variable costing:

particulars	year 1	year 2
revenue	930000	1550000
less:variable cost
diect material	120000	120000
direct labour	200000	200000
variable seeling and administrative expenses	15000*3=45000	25000*3=75000
contribution	565000	1155000

net operating income under absorption costing:

revenue	930000	1550000
-variable costs
direct material dierect labour variable selling and distribution overheads	(120000) (20000) (45000)	(120000) (20000) (75000)
	565000	1155000
-fixed costs
-fixed selling and administrative expenses	(248000)	(248000)
-fixed manufacturing overheads	(360000)	(360000)
profit/loss	(43000)	547000