Question

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Sales (e $63 per unit) Cost of goods sold ( 540 per unit) Gross margin Selling and administrative expenses Net operating income Year 1 $1,071,000 680,000 391.000 301.000 $ 190,0001 Year 2 $1,701,000 1,080,000 621,000 331,000 $ 290,000 ances *$3 per unit variable: $250,000 fixed each year. The company's $40 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($440,000 + 22,000 units) Absorption costing unit product cost

Answer 1

Answer to Question 1:

Requirement 1:

Year 1 and Year 2:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
Unit product cost = $7 + $10 + $3
Unit product cost = $20

Requirement 2:

Year 2 1,701,000 Heaton Company Variable Costing Income Statement Year 1 Sales 1,071,000 Variable Expenses: Variable Cost of Goods Sold 340,000 Variable Selling and Administrative Expenses 51,000 Total Variable Expenses 391,000 Contribution Margin 680,000 Fixed Expenses: Fixed Manufacturing Overhead 440,000 Fixed Selling and Administrative Expenses 250,000 Total Fixed Expenses 690,000 Net Operating Income -10,000 540,000 81,000 621,000 1,080,000 440,000 250,000 690,000 390,000

Year 1:

Variable cost of goods sold = Unit product cost * Units sold
Variable cost of goods sold = $20 * 17,000
Variable cost of goods sold = $340,000

Variable selling and administrative expense = Variable selling and administrative expense per unit * Units sold
Variable selling and administrative expense = $3 * 17,000
Variable selling and administrative expense = $51,000

Year 2:

Variable cost of goods sold = Unit product cost * Units sold
Variable cost of goods sold = $20 * 27,000
Variable cost of goods sold = $540,000

Variable selling and administrative expense = Variable selling and administrative expense per unit * Units sold
Variable selling and administrative expense = $3 * 27,000
Variable selling and administrative expense = $81,000

Requirement 3:

econciliation of Variable Costing and Absorption Costing Net Operating Incon Year 1 Year 2 Variable Costing Net Operating Income (Loss) . -10,000 390,000 Add / (Deduct): Fixed Manufacturing overhead deferred in (released form) inventory under 100,000 -100,000 Absorption Costing Net Operating Income 90,000 290,000