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; $247,000 fixed each year.

The company’s $42 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) $ 1,116,000 $ 1,736,000 Cost of goods sold (@ $42 per unit) 756,000 1,176,000 Gross margin 360,000 560,000 Selling and administrative expenses* 301,000 331,000 Net operating income $ 9,000 $ 229,000

Explanation / Answer

1) Year 1 Year 2 Number of units sold 18000 28000 Direct materials 10 10 Direct labor 13 13 Variable manufacturing overhead 5 5 Fixed manufacturing overhead                   17.89 14 (322000/18000) (322000/23000) Total product cost                   45.89 42 2) Year 1 Year 2 Number of units sold 18000 28000 Sales (@ $62 per unit) 1116000 1736000 Variable costs: Direct materials (@ $10 per unit) 180000 280000 Direct labor (@ $13 per unit) 234000 364000 Variable manufacturing overhead (@ $5 per unit) 90000 140000 Selling and administrative expenses (@ $3 per unit) 54000 84000 Total Variable costs 558000 868000 Contribution margin 558000 868000 Fixed costs: Fixed manufacturing overhead 322000 322000 Selling and administrative expenses 247000 247000 (18000*3+247000) (28000*3+247000) Total Fixed costs 569000 569000 Net operating income -11000 299000 3) Year 1 Year 2 Net operating income as per variable costing -11000 299000 Difference due to fixed manufacturing overhead 70000 -70000 (322000-(18000*14) (322000-(28000*14) Net operating income as per absorbtion costing 59000 229000

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