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)	$	1,116,000		$	1,736,000
Cost of goods sold (@ $33 per unit)		594,000			924,000
Gross margin		522,000			812,000
Selling and administrative expenses*		302,000			332,000
Net operating income	$	220,000		$	480,000

* $3 per unit variable; $248,000 fixed each year.

The company’s $33 unit product cost is computed as follows:

Direct materials	$	5
Direct labor		11
Variable manufacturing overhead		3
Fixed manufacturing overhead ($322,000 ÷ 23,000 units)		14
Absorption costing unit product cost	$	33

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

Questions:

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