During Heaton Company\'s first two years of operations, it reported absorption c

Question

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows Year 1 Year 2 Sales (@ $63 per unit) Cost of goods sold ( $33 per unit) Gross margin Selling and administrative expenses Net operating income $ 1,008,000 1,638,000 858,000 780,000 330,000 $ 1180,000450,000 528,000 480,000 300,000 $3 per unit variable; $252,000 fixed each year The company's $33 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($252,000 ÷ 21,000 units) Absorption costing unit product cost 4 12 $ 33 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 Units produced Units sold Year 1 21,000 16,000 26,00e Year 2 21,000 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

Explanation / Answer

1. Unit Product Cost for both years will be:

Direct Material+Direct labour+Variable overhead = 6+11+4 = 21

2. Net Profit by variable costing is:

3. Reconciliation will be:

Heaton's Company Variable Costing Income Statement Year 1 Year 2 Particulars Amount ($) Amount ($)   Sales 16,000*63 1,008,000 26,000*63 1,638,000   Variable expenses:      Variable cost of goods sold 16,000*21 336,000 26,000*21 546,000      Variable selling and administrative expenses 16,000*3 48,000 26,000*3 78,000 Total variable expenses 384,000 624,000   Contribution margin 624,000 1,014,000   Fixed expenses:      Fixed manufacturing overhead 252,000 252,000      Fixed selling and administrative 252,000 252,000 Total fixed expenses 504,000 504,000 Net operating Profit/loss 120,000 510,000

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