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 $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 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) $ 1,240,000 $ 1,860,000 Cost of goods sold (@ $37 per unit) 740,000 1,110,000 Gross margin 500,000 750,000 Selling and administrative expenses* 309,000 339,000 Net operating income $
91,000 $ 411,000

Explanation / Answer

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 Direct material 5 5 Direct labour 9 9 Variable manufacturing overhead 4 4 Unit product cost 18 18

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