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)	$	1,054,000		$	1,674,000
Cost of goods sold (@ $33 per unit)		561,000			891,000
Gross margin		493,000			783,000
Selling and administrative expenses*		301,000			331,000
Net operating income	$	\192,000\		$	452,000

* $3 per unit variable; $250,000 fixed each year.

The company’s $33 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		11
Variable manufacturing overhead		1
Fixed manufacturing overhead ($308,000 ÷ 22,000 units)		14
Absorption costing unit product cost	$	33

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	22,000	22,000
Units sold	17,000	27,000

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		Year 1	Year 2
	Direct Material Cost (22000*7)	154,000	154,000
	Direct Labour Cost (22000*11)	242,000	242,000
	Variable manufacturing Overhead	22,000	22,000
	Total Production Cost	418,000	418,000
	Unit produce	22000	22000
	Unit Product cost	19.0	19.0
		Year 1	Year 2
2	Sales @ 62 per Unit	1,054,000	1,674,000
	Product cost @ 19 Per Unit	323,000	513,000
	Fixed Manufacturing OH	308,000	308,000
	Varaible Selling & Administrion OH	51,000	81,000
	Fixed Selling & Administrion OH	250,000	250,000
	Net Operating Income	122,000	522,000
	Reconclilation
		Year 1	year 2
	Variable Costin Net Income	122,000	522,000
	Fixed Manufactuing Overhead Expenses With variable Costing	558,000	558,000
	Less: Fixed Manufacturing Cost with absorption Costing	488,000	628,000
	Diffrence	70,000	-70,000
	Absorption Costing net income	192,000	452,000