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 (@ \$25 per unit) \$ 1,000,000 \$ 1,250,000 Cost of goods sold (@ \$18 per unit) 720,000 900,000 Gross margin 280,000 350,000 Selling and administrative expenses* 210,000 230,000 Net operating income \$ 70,000 \$ 120,000

*\$2 per unit variable; \$130,000 fixed each year.

The company’s \$18 unit product cost is computed as follows:

 Direct materials \$ 4 Direct labor 7 Variable manufacturing overhead 1 Fixed manufacturing overhead (\$270,000 ÷ 45,000 units) 6 Absorption costing unit product cost \$ 18

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 45,000 45,000 Units sold 40,000 50,000

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.

 Year 1 Year 2 Direct materials \$         4 \$         4 Direct labor \$         7 \$         7 Variable manufacturing overhead \$         1 \$         1 Product cost under variable costing \$       12 \$       12

Fixed overhead will not consider while calculating product cost under variable costing.

2.

 Heaton Company Variable costing income statement Year 1 Year 2 Sales (@ \$25 per unit) \$                       1,000,000 \$                       1,250,000 Variable expense Direct material 40,000*\$4 = \$160,000 50,000*\$4 = \$200,000 Direct labour 40,000*\$7 = \$280,000 50,000*\$7 = \$350,000 Variable manufacturing overhead 40,000*\$1 = \$40,000 50,000*\$1 = \$50,000 Variable selling and administrative overhead 40,000*\$2 = \$80,000 50,000*\$2 = \$100,000 total variable cost \$                           560,000 \$                           700,000 Contribution margin \$                           440,000 \$                           550,000 Fixed costs Manufacturing overhead \$                           270,000 \$                           270,000 Selling and administrative expenses \$                           130,000 \$                           130,000 Total fixed costs \$                           400,000 \$                           400,000 Net operating income \$                             40,000 \$                           150,000

3.

 Reconciliation of Variable costing and Absorption costing net operating income Year 1 Year 2 Variable costing net operating income (loss) \$                        40,000 \$                         150,000 Add fixed manufacturing overhead deferred in inventory under absorption costing 5,000*\$6 = \$30,000 Deduct fixed manufacturing overhead released from inventory under absorption costing 5,000*\$6 = (\$30,000) Absorption costing net operating income (loss) \$                        70,000 \$                         120,000

You can reach me over comment box if you have any doubts. Please rate this answer

#### Earn Coins

Coins can be redeemed for fabulous gifts.