Question

# Problem 6-19 Variable Costing Income Statement; Reconciliation [LO6-2, LO6-3] During Heaton Company’s first two years of...

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.

#### Homework Answers

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
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