Question

Problem 6-19 Variable Costing Income Statement; Reconciliation [LO6-2, LO6-3]

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

	Year 1			Year 2
Sales (@ $64 per unit)	$	1,152,000		$	1,792,000
Cost of goods sold (@ $43 per unit)		774,000			1,204,000
Gross margin		378,000			588,000
Selling and administrative expenses*		299,000			329,000
Net operating income	$	\79,000\		$	259,000

* $3 per unit variable; $245,000 fixed each year.

The company’s $43 unit product cost is computed as follows:

Direct materials	$	9
Direct labor		11
Variable manufacturing overhead		5
Fixed manufacturing overhead ($414,000 ÷ 23,000 units)		18
Absorption costing unit product cost	$	43

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:

	Year 1	Year 2
Units produced	23,000	23,000
Units sold	18,000	28,000

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.

Answer 1

1
	Year 1	Year 2
Direct materials	9	9
Direct labor	11	11
Variable manufacturing overhead	5	5
Unit product cost	25	25
2
	Year 1	Year 2
Sales	1152000	$1,792,000
Variable expenses:
Variable cost of goods sold	450000	700000
Variable selling and administrative expenses	54000	84000
Total Variable expenses	504000	784000
Contribution margin	648000	1008000
Fixed expenses:
Fixed manufacturing overhead	414000	414000
Fixed selling and administrative expenses	245000	245000
Total Fixed expenses	659000	659000
Net operating income(loss)	($11,000)	$349,000
3
	Year 1	Year 2
Variable costing net income(loss)	($11,000)	$349,000
Add(deduct) fixed manufacturing overhead deferred in(released)	90000	(90000)
Absorption costing net operating income(loss)	$79,000	$259,000