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; $253,000 fixed each year.

The company’s $39 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 (@ $64 per unit) $ 1,152,000 $ 1,792,000 Cost of goods sold (@ $39 per unit) 702,000 1,092,000 Gross margin 450,000 700,000 Selling and administrative expenses* 307,000 337,000 Net operating income $ c,000 $ 363,000

Explanation / Answer

Answer 1 Calculation of Unit product cost of both years under Variable costing Year 1 Year 2 Direct Material $8.00 $8.00 Direct Labor $9.00 $9.00 Variable Manufacturing Overhead $4.00 $4.00 Unit product Cost $21.00 $21.00 Answer 2 Calculation of Variable costing Net Operating Income under Variable Costing Year 1 Year 2 Sales $1,152,000 $1,792,000 Cost of goods sold ($21 per unit) $378,000 $588,000 Gross Margin $774,000 $1,204,000 Less : Fixed Manufacturing Overheads $414,000 $414,000 Less : Selling and administrative Expenses $307,000 $337,000 Net Operating income $53,000 $453,000 Answer 3 Reconcile the absorption costing and the variable costing net operating income figures for each year. Year 1 Year 2 Absorption costing net income $143,000.00 $363,000.00 Less : Fixed manufacturing overheads included in closing inventories (5000 units * $18) $90,000.00 $0.00 Add : Fixed manufacturing overheads included in opening inventories $0.00 $90,000.00 Variable Costing Net Income $53,000.00 $453,000.00

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