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; $246,000 fixed each year.

The company’s $38 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 (@ $62 per unit) $ 992,000 $ 1,612,000 Cost of goods sold (@ $38 per unit) 608,000 988,000 Gross margin 384,000 624,000 Selling and administrative expenses* 294,000 324,000 Net operating income $ 90,000 $ 300,000

Explanation / Answer

1) unit product cost under variable costing Direct materials 8 direct labor 9 variable manufacturing overhead 2 unit product cost under variable costing 19 2) Variable costing net operating income Year 1 Year 2 Sales 992,000 1,612,000 variable cost of goods sold 304000 494000 Variable selling expense 48000 78000 Contribution margin 640,000 1,040,000 fixed expense 645,000 645,000 Net operating income (loss) -5,000 395,000 3) Reconciliation Year 1 year 2 Net income (loss) under variable costing -5,000 395,000 Add :fixed overhead deferred in ending inventory(5000*19) 95000 less:Fixed overhead released in beginning inventory -95,000 Net income under absorption costing 90,000 300,000

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