During Heaton Company’s first two years of operations, the company reported abso
ID: 2466018 • Letter: D
Question
During Heaton Company’s first two years of operations, the company reported absorption costing net operating income as follows:
Year 1 Year 2
Sales (@ $25 per unit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000 $1,250,000
Cost of goods sold (@ $18 per unit) . . . . . . . . . . . . . . . . . . . . . . 720,000 900,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,000 350,000
Selling and administrative expenses * . . . . . . . . . . . . . . . . . . . . . 210,000 230,000
Net operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,000 $ 120,000
*$2 per unit variable; $130,000 fixed each year.
The company’s $18 unit product cost is computed as follows:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Fixed manufacturing overhead ($270,000 4 45,000 units) . . . . . . . 6
Absorption costing unit product cost . . . . . . . . . . . . . . . . . . . . . . . . $18
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 two years are:
Year 1 Year 2
Units produced . . . . . . . . . . 45,000 45,000
Units sold . . . . . . . . . . . . . 40,000 50,000
Required:
1. Prepare a variable costing contribution format income statement for each year.
2. Reconcile the absorption costing and the variable costing net operating income figures for each year.
Explanation / Answer
1. The unit product cost under variable costing is computed as follows:
Direct materials........................
$4
Direct labor..............................
7
Variable manufacturing overhead
1
Variable costing unit product cost
$12
With this figure, the variable costing income statements can be prepared:
Year 1
Year 2
Unit sales...............................................
40,000 units
50,000 units
Sales......................................................
$1,000,000
$1,250,000
Variable expenses:
Variable cost of goods sold
(@ $12 per unit).................................
480,000
600,000
Variable selling and administrative expenses (@ $2 per unit)....................
80,000
100,000
Total variable expenses............................
560,000
700,000
Contribution margin.................................
440,000
550,000
Fixed expenses:
Fixed manufacturing overhead...............
270,000
270,000
Fixed selling and administrative expenses
130,000
130,000
Total fixed expenses.................................
400,000
400,000
Net operating income...............................
$ 40,000
$ 150,000
2. The reconciliation of absorption and variable costing follows:
Year 1
Year 2
Units in beginning inventory.....................
0
5,000
+ Units produced....................................
45,000
45,000
Units sold............................................
40,000
50,000
= Units in ending inventory......................
5,000
0
Year 1
Year 2
Fixed manufacturing overhead in ending inventory (5,000 units × $6 per unit).......
$30,000
$ 0
Fixed manufacturing overhead in beginning inventory (5,000 units × $6 per unit)..............................................
30,000
= Manufacturing overhead deferred in (released from) inventory.......................
$30,000
$(30,000)
Year 1
Year 2
Variable costing net operating income (loss)...................................................
$40,000
$150,000
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing.................................................
30,000
Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing.................................
(30,000)
Absorption costing net operating income....
$70,000
$120,000
Direct materials........................
$4
Direct labor..............................
7
Variable manufacturing overhead
1
Variable costing unit product cost
$12
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.