During Heaton Company\'s first two years of operations, it reported absorption c
ID: 2330205 • Letter: D
Question
During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows Year 1 Year 2 Sales ( $64 per unit) Cost of goods sold ( $37 per unit) Gross margin Selling and administrative expenses* Net operating income 1,024,00 1,664,000 592,000 962,000 702,000 329,000 S 1133,e001 373,000 432,000 299,000 $3 per unit variable; $251,000 fixed each year The company's $37 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($357,000 ÷ 21,000 units) Absorption costing unit product cost 10 17 $ 37 Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings. Units produced Units sold Year 21,000 16,000 Year 21,e00 26,000 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 Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3 What is the variable costing net operating income in Year 1 and in Year 2? (Loss amounts should be indicated with a minus Year 1 Year 2 Net operating income (loss) Required 1 Required 2 Required 3 Reconcile the absorption costing and the variable costing net operating income figures for each year. (Enter any losses deductions as a negative value.) Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Variable costing net operating income (loss) Absorption costing net operating income Required 2 Required 3Explanation / Answer
Requirement 1
Product Unit cost using Variable costing
Product Cost
Per Unit
Direct material
$ 9.00
Direct labor
$ 10.00
Variable manufacturing Overheads
$ 1.00
Variable Selling and Administrative Expense
$ 3.00
Total Unit cost
$ 23.00
Fixed cost is excluded in calculating unit cost under variable costing.
Heaton Company
Variable Costing Income Statement
Year 1
Year 2
Sales
$ 1,024,000.00
$ 1,664,000.00
Less: Variable Cost
Direct Material
$ 144,000.00
$ 234,000.00
Direct Labor
$ 160,000.00
$ 260,000.00
Variable Overheads
$ 16,000.00
$ 26,000.00
Variable selling and Administrative expenses
$ 48,000.00
$ 78,000.00
Total Variable cost
$ 368,000.00
$ 598,000.00
Contribution Margin
$ 656,000.00
$ 1,066,000.00
Less: Fixed Cost
Fixed manufacturing Overheads
$ 357,000.00
$ 357,000.00
Fixed Selling and Administrative Expenses
$ 251,000.00
$ 251,000.00
Total Fixed cost
$ 608,000.00
$ 608,000.00
Net Income
$ 48,000.00
$ 458,000.00
Heaton Company
Reconciliation of Variable costing and Absorption Costing system
Year 1
Year 2
Variable Costing net Operating Income (loss)
$ 48,000.00
$ 458,000.00
Fixed cost apportioned under Absorption costing to Finished unsold Inventory (17*5000 Units)
$ 85,000.00
$ (85,000.00)
Absorption Costing net Operating Income
$ 133,000.00
$ 373,000.00
$85000 of inventory in year 1 is the closing unsold inventory which increased profit as per absorption costing. Since in absorption costing the fixed cost is allocated to all the goods produced and some portion of fixed cost can be seen in unsold finished inventory. In variable costing fixed cost is charged as period cost and no coat is assigned to unsold inventory and whole cost is. This is reason why profits under both methods are deferent.
$85000 deducted in Year 2 represents Fixed cost apportioned to beginning finished inventory. The amount is deducted because there would be no fixed cost apportionment under variable costing since under variable costing all fixed cost is considered a period cost and charged in the period incurred.
Please note that Inventory indicated as a reconciling entry only includes fixed cost allocation portion. Actual Finished inventory is more than $85000 since 5000 units are fully complete finished inventory includes material labor and overhead cost too.
Feel free to ask queries regarding this question in the comment section.
Requirement 1
Product Unit cost using Variable costing
Product Cost
Per Unit
Direct material
$ 9.00
Direct labor
$ 10.00
Variable manufacturing Overheads
$ 1.00
Variable Selling and Administrative Expense
$ 3.00
Total Unit cost
$ 23.00
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.