During Heaton Company’s first two years of operations, it reported absorption co
ID: 2332236 • Letter: D
Question
During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:
* $3 per unit variable; $251,000 fixed each year.
The company’s $38 unit product cost is computed as follows:
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 operatons are:
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.
Year 1 Year 2 Sales (@ $62 per unit) $ 1,054,000 $ 1,674,000 Cost of goods sold (@ $38 per unit) 646,000 1,026,000 Gross margin 408,000 648,000 Selling and administrative expenses* 302,000 332,000 Net operating income $ F,000 $ 316,000Explanation / Answer
1) unit product cost under variable costing Direct materials 7 direct labor 10 variable manufacturing overhead 4 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 1,054,000 1,674,000 Variable expenses: Variable cost of goods sold 357000 567000 Variable selling & adm expense 51000 81000 total variable expense 408000 648000 Contribution margin 646,000 1,026,000 fixed expenses: fixed manufacturing overhead 374,000 374,000 Fixed selling and adm expense 251,000 251,000 total fixed expense 625,000 625,000 net operating income 21,000 401,000 3) Reconcilation year 1 year 2 Variable costing net income 21,000 401,000 Add Fixed oh deferred(released) in ending inventory 85,000 -85,000 Absorption costing net income 106,000 316,000 fixed overhead deferred (released)= ending inventory *FOH per unit 5000*17= 85,000 3) OR Reconcilation year 1 year 2 Variable costing net income 21,000 401,000 Add Fixed oh deferred in ending inventory 85,000 less:fixed on released in ending invnetory -85,000 Absorption costing net income 106,000 316,000
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