Question

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

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

Year 1 Year 2
Sales (@ $61 per unit) $ 915,000 $ 1,525,000
Cost of goods sold (@ $37 per unit) 555,000 925,000
Gross margin 360,000 600,000
Selling and administrative expenses* 297,000 327,000
Net operating income $ \63,000\ $ 273,000

* $3 per unit variable; $252,000 fixed each year.

The company’s $37 unit product cost is computed as follows:

Direct materials $ 6
Direct labor 10
Variable manufacturing overhead 3
Fixed manufacturing overhead ($360,000 ÷ 20,000 units) 18
Absorption costing unit product cost $ 37

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 20,000 20,000
Units sold 15,000 25,000

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 6 6
Direct labor 10 10
Variable manufacturing overhead 3 3
Unit product cost 19 19
2
Year 1 Year 2
Sales 915000 $1,525,000
Variable expenses:
Variable cost of goods sold 285000 475000
Variable selling and administrative expenses 45000 75000
Total Variable expenses 330000 550000
Contribution margin 585000 975000
Fixed expenses:
Fixed manufacturing overhead 360000 360000
Fixed selling and administrative expenses 252000 252000
Total Fixed expenses 612000 612000
Net operatimg income(loss) ($27,000) $363,000
3
Year 1 Year 2
Variable costing net income ($27,000) $363,000
Add(deduct) fixed manufacturing overhead deferred in(released) 90000 -90000
Absorption costing net operating income $63,000 $273,000
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