Question

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

	Year 1			Year 2
Sales (@ $60 per unit)	$	1,080,000		$	1,680,000
Cost of goods sold (@ $41 per unit)		738,000			1,148,000
Gross margin		342,000			532,000
Selling and administrative expenses*		307,000			337,000
Net operating income	$	35,000		$	195,000

* $3 per unit variable; $253,000 fixed each year.

The company’s $41 unit product cost is computed as follows:

Direct materials	$	9
Direct labor		9
Variable manufacturing overhead		4
Fixed manufacturing overhead ($437,000 ÷ 23,000 units)		19
Absorption costing unit product cost	$	41

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

1.  What is the variable costing net operating income in Year 1 and in Year 2?
2.  Reconcile the absorption costing and the variable costing net operating income figures for each year.

Answer 1