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)	$	992,000		$	1,612,000
Cost of goods sold (@ $35 per unit)		560,000			910,000
Gross margin		432,000			702,000
Selling and administrative expenses*		295,000			325,000
Net operating income	$	\137,000\		$	377,000

* $3 per unit variable; $247,000 fixed each year.

The company’s $35 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		11
Variable manufacturing overhead		3
Fixed manufacturing overhead ($294,000 ÷ 21,000 units)		14
Absorption costing unit product cost	$	35

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	21,000	21,000
Units sold	16,000	26,000

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.

Using variable costing, what is the unit product cost for both years?

	Unit product cost $21selected answer correct

What is the variable costing net operating income in Year 1 and in Year 2? (Loss amounts should be indicated with a minus sign.)

	Year 1 Year 2 Net operating income (loss) $62,000selected answer incorrect $442,000selected answer incorrect

Reconcile the absorption costing and the variable costing net operating income figures for each year.

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Variable costing net operating income (loss) $62,000selected answer incorrect $442,000selected answer incorrect Add: Fixed manufacturing overhead cost deferred in inventory under absorption costingselected answer correct 70,000selected answer correct 0selected answer correct Less: Fixed manufacturing overhead cost released from inventory under absorption costingselected answer correct 0selected answer correct 70,000selected answer correct Absorption costing net operating income $132,000selected answer incorrect $372,000selected answer incorrect

Answer 1

1)	unit product cost under variable costing
	Direct materials				7
	direct labor				11
	variable manufacturing overhead				3
	unit product cost under variable costing				21
	for both years $21 is the unit product cost
2)		Heaton /company
	Varible costing income statement
					year 1	year 2
	Sales				992,000	1,612,000
	Variable expenses:
	Variable cost of goods sold				336000	546000
	Variable selling & adm expense				48000	78000
	total variable expense				384000	624000
	Contribution margin				608,000	988,000
	fixed expenses:
	fixed manufacturing overhead				294,000	294,000
	Fixed selling and adm expense				247,000	247,000
	total fixed expense				541,000	541,000
	net operating income				67,000	447,000
	fixed overhead deferred (released)= ending inventory *FOH per unit
				5000*14=	70,000
3)
	Reconcilation
						year 1	year 2
	Variable costing net income					67,000	447,000
	Add Fixed oh deferred in ending inventory					70,000
	less:fixed on released in ending invnetory						-70,000
	Absorption costing net income					137,000	377,000