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; $250,000 fixed each year.

The company’s $30 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:

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 (@ $61 per unit) $ 1,220,000 $ 1,830,000 Cost of goods sold (@ $30 per unit) 600,000 900,000 Gross margin 620,000 930,000 Selling and administrative expenses* 310,000 340,000 Net operating income $ È,000 $ 590,000

Explanation / Answer

Answer 2 Calculation of variable costing net operating income Year 1 Year 2 Sales $1,220,000 $1,830,000 Less : Variable costs - Production costs [$19 per unit] $380,000 $570,000 - Selling and admin costs [$3 per unit] $60,000 $90,000 Contribution Margin $780,000 $1,170,000 Less : Fixed Costs - Production costs $275,000 $275,000 - Selling and admin costs $250,000 $250,000 Net Operating Income $255,000 $645,000 Answer 3 Reconcile the absorption costing and the variable costing net operating income figures for each year. Year 1 Year 2 Absorption costing net operating income $310,000 $590,000 Less : Fixed manufacturing overheads included in closing inventories [5000 units * $11] $55,000 $0 Add : Fixed manufacturing overheads included in opening inventories $0 $55,000 Variable costing net operating income $255,000 $645,000

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