Question

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 $ 1,612,000 962,000 650,000 332,000 Sales ( $62 per unit) Cost of goods sold (@ $37 per unit) Gross margin Selling and administrative expenses 992,000 592,000 400,000 302,000 $ 198,000\ 318,000 $ Net operating income *$3 per unit variable; $254,000 fixed each year. The company's $37 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($315,000 21,000 units) 7 13 2 15 $ 37 Absorption costing unit product cost 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 2 21,000 26,000 Year 1 Units produced Units sold 21,000 16,000 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. Complete this question by entering your answers in the tabs below. Required 1 Required 3 Required 2 Using variable costing, what is the unit product cost for both years?

Answer 1

Requirement: 1 Calculation of Unit cost Under Variable Costing Year 1 Direct Material 7.00 Direct Labor 13.00 Variable Manufacturing Overhead 2.00 Unit Cost 22.00 Year 2 7.00 13.00 2.00 22.00 Requirement: 2 Heatson company Variable Costing Income Statement Year 1 992000 Year 2 1612000 Sales (@62Per unit) Variable Expense : Variable cost of goods sold (@22) 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 352000 48000 400000 592000 5720001 78000 650000 962000 3150001 254000 569000 23000 315000 254000 569000 393000

Requirement: 3 Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Net Operating Income 23000 393000 Add(Deduct) Fixed Manufacturing Overheads cost Deferred in (released From) inventory 75000 -75000 Absorption Costing Net Operating Income or loss 98000 318000