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; $249,000 fixed each year.

The company’s $40 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 (@ $64 per unit) $ 1,280,000 $ 1,920,000 Cost of goods sold (@ $40 per unit) 800,000 1,200,000 Gross margin 480,000 720,000 Selling and administrative expenses* 309,000 339,000 Net operating income $ y,000 $ 381,000

Explanation / Answer

Compute the Variable costing Unit Product cost Year 1 Year 2 Direct Material 9 9 Direct labour 11 11 Variable Manufacturing overheads 3 3 Variable costing unit prroduct cost 23 23 Construct The Variable Costing Income Statement under FIFO YEAR 1 YEAR 2 Sales 1,280,000 1,920,000 Less: Variable cost    variable cost of goods sold 460,000 690,000    Variable selling expense 60,000 520,000 90,000 780,000 Contribution margin 760,000 1,140,000 Fixed expense:    Fixed Manufacturing overheads 425,000 425,000    Fixed selling expense 249,000 249,000 Net operating Income 86,000 466,000 Reconciliation Statement: Year-1 Net income as per Variable costing 86000 Add: Fixed OH Deffered (5000 units @17) 85000 Net income as per Absorption costing 171000 Year-2 Net income as per Variable costing 466000 Less: Fixed OH released (5000 units @17) 85000 Net income as per Absorption costing 381000

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