During Heaton Company’s first two years of operations, it reported absorption co

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 (@ $36 per unit) 612,000 972,000 Gross margin 442,000 702,000 Selling and administrative expenses* 303,000 333,000 Net operating income $ 9,000 $ 369,000 * $3 per unit variable; $252,000 fixed each year. The company’s $36 unit product cost is computed as follows: Direct materials $ 6 Direct labor 11 Variable manufacturing overhead 4 Fixed manufacturing overhead ($330,000 ÷ 22,000 units) 15 Absorption costing unit product cost $ 36 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: 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.

Explanation / Answer

1) unit product cost under variable costing Direct materials 6 direct labor 11 variable manufacturing overhead 4 unit product cost under variable costing 21 for both years $24 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 330,000 330,000 Fixed selling and adm expense 252,000 252,000 total fixed expense 582,000 582,000 net operating income 64,000 444,000 3) Reconcilation year 1 year 2 Variable costing net income 64,000 444,000 Add Fixed oh deferred(released) in ending inventory 75,000 -75,000 Absorption costing net income 139,000 369,000 fixed overhead deferred (released)= ending inventory *FOH per unit 5000*15= 75,000 3) OR Reconcilation year 1 year 2 Variable costing net income 64,000 444,000 Add Fixed oh deferred in ending inventory 75,000 less:fixed on released in ending invnetory -75,000 Absorption costing net income 139,000 369,000

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