In: Accounting
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) | $ | 976,000 | $ | 1,586,000 | |
Cost of goods sold (@ $39 per unit) | 624,000 | 1,014,000 | |||
Gross margin | 352,000 | 572,000 | |||
Selling and administrative expenses* | 302,000 | 332,000 | |||
Net operating income | $ | \50,000\ | $ | 240,000 | |
* $3 per unit variable; $254,000 fixed each year.
The company’s $39 unit product cost is computed as follows:
Direct materials | $ | 5 |
Direct labor | 11 | |
Variable manufacturing overhead | 4 | |
Fixed manufacturing overhead ($399,000 ÷ 21,000 units) | 19 | |
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 | 21,000 | 21,000 |
Units sold | 16,000 | 26,000 |
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.