Question

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

	Year 1			Year 2
Sales (@ $62 per unit)	$	930,000		$	1,550,000
Cost of goods sold (@ $34 per unit)		510,000			850,000
Gross margin		420,000			700,000
Selling and administrative expenses*		294,000			324,000
Net operating income	$	126,000		$	376,000

* $3 per unit variable; $249,000 fixed each year.

The company’s $34 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		10
Variable manufacturing overhead		4
Fixed manufacturing overhead ($260,000 ÷ 20,000 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 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.

Answer 1