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; $252,000 fixed each year.

The company’s $37 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 (@ $61 per unit) $ 915,000 $ 1,525,000 Cost of goods sold (@ $37 per unit) 555,000 925,000 Gross margin 360,000 600,000 Selling and administrative expenses* 297,000 327,000 Net operating income $ 3,000 $ 273,000

Explanation / Answer

1 Year 1 Year 2 Direct materials 6 6 Direct labor 10 10 Variable manufacturing overhead 3 3 Unit product cost 19 19 2 Year 1 Year 2 Sales 915000 $1,525,000 Variable expenses: Variable cost of goods sold 285000 475000 Variable selling and administrative expenses 45000 75000 Total Variable expenses 330000 550000 Contribution margin 585000 975000 Fixed expenses: Fixed manufacturing overhead 360000 360000 Fixed selling and administrative expenses 252000 252000 Total Fixed expenses 612000 612000 Net operatimg income(loss) ($27,000) $363,000 3 Year 1 Year 2 Variable costing net income ($27,000) $363,000 Add(deduct) fixed manufacturing overhead deferred in(released) 90000 -90000 Absorption costing net operating income $63,000 $273,000

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