Question

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $63 per unit) $ 1,260,000 $ 1,890,000 Cost of goods sold (@ $34 per unit) 680,000 1,020,000 Gross margin 580,000 870,000 Selling and administrative expenses* 311,000 341,000 Net operating income $ \269,000\ $ 529,000 * $3 per unit variable; $251,000 fixed each year. The company’s $34 unit product cost is computed as follows: Direct materials $ 9 Direct labor 9 Variable manufacturing overhead 3 Fixed manufacturing overhead ($325,000 ÷ 25,000 units) 13 Absorption costing unit product cost $ 34 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 operatons are: Year 1 Year 2 Units produced 25,000 25,000 Units sold 20,000 30,000 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	9	9
Variable manufacturing overhead	3	3
Variable costing unit product cost	21	21
2
	Year 1	Year 2
Sales	1260000	$1,890,000
Variable expenses:
Variable cost of goods sold	420000	630000
Variable selling and administrative expenses	60000	90000
Total Variable expenses	480000	720000
Contribution margin	780000	1170000
Fixed expenses:
Fixed manufacturing overhead	325000	325000
Fixed selling and administrative expenses	251000	251000
Total Fixed expenses	576000	576000
Net operatimg income(loss)	$204,000	$594,000
2
	Year 1	Year 2
Variable costing net income	$204,000	$594,000
Add(deduct)fixed manufacturing overhead deferred in(released from)inventory	65000	-65000
Absorption costing net operating income	$269,000	$529,000