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:

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

The company’s $45 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 operations 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 (@ $60 per unit) $ 900,000 $ 1,500,000 Cost of goods sold (@ $45 per unit) 675,000 1,125,000 Gross margin 225,000 375,000 Selling and administrative expenses* 295,000 325,000 Net operating income $ (70,000) $ 50,000

Explanation / Answer

1) unit product cost under variable costing Direct materials 9 direct labor 12 variable manufacturing overhead 5 unit product cost under variable costing 26 for both years $26 is the unit product cost 2) Heaton /company Varible costing income statement year 1 year 2 Sales 900,000 1,500,000 Variable expenses: Variable cost of goods sold 390000 650000 Variable selling & adm expense 45000 75000 total variable expense 435000 725000 Contribution margin 465,000 775,000 fixed expenses: fixed manufacturing overhead 380,000 380,000 Fixed selling and adm expense 250,000 250,000 total fixed expense 630,000 630,000 net operating income -165,000 145,000 3) Reconcilation year 1 year 2 Variable costing net income -165,000 145,000 Add Fixed oh deferred(released) in ending inventory 95,000 -95,000 Absorption costing net income -70,000 50,000 fixed overhead deferred (released)= ending inventory *FOH per unit 5000*19= 95,000 OR Reconcilation year 1 year 2 Variable costing net income -165,000 145,000 Add Fixed oh deferred in ending inventory 95,000 less:fixed on released in ending invnetory -95,000 Absorption costing net income -70,000 50,000

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