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)	$	1,178,000		$	1,798,000
Cost of goods sold (@ $39 per unit)		741,000			1,131,000
Gross margin		437,000			667,000
Selling and administrative expenses*		308,000			338,000
Net operating income	$	129,000		$	329,000

* $3 per unit variable; $251,000 fixed each year.

The company’s $39 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		9
Variable manufacturing overhead		4
Fixed manufacturing overhead ($432,000 ÷ 24,000 units)		18
Absorption costing unit product cost	$	39

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	24,000	24,000
Units sold	19,000	29,000

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