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 $33 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 (@ $63 per unit) $ 1,008,000 $ 1,638,000 Cost of goods sold (@ $33 per unit) 528,000 858,000 Gross margin 480,000 780,000 Selling and administrative expenses* 297,000 327,000 Net operating income $
83,000 $ 453,000

Explanation / Answer

1.

2.

3.

Unit product cost under variable costing: Direct materials 7 Direct labor 8 Variable manufacturing overhead 3 Unit product cost 18

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