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)	$	1,071,000		$	1,701,000
Cost of goods sold (@ $34 per unit)		578,000			918,000
Gross margin		493,000			783,000
Selling and administrative expenses*		300,000			330,000
Net operating income	$	193,000		$	453,000

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

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

Direct materials	$	6
Direct labor		11
Variable manufacturing overhead		3
Fixed manufacturing overhead ($308,000 ÷ 22,000 units)		14
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	22,000	22,000
Units sold	17,000	27,000

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) unit product cost under variable costing is $20 for both years.

calculation

PARTICULARS	AMOUNT($)
direct material	6
direct labour	11
variable manufacturing overhead	3
Variable cost unit product cost	20

note:under variable costing, only variable costs related to production wil consider to arrive cost per unit.

2) VARIABLE COSTING NET OPERATING INCOME

	YEAR 1	YEAR 2
PARTICULARS	AMOUNT($)	AMOUNT($)
sales	1071000	1701000
less:variable costs of goods sold	340000	540000
variable selling and administrative expenses	51000	81000
contribution margin	680000	1080000
fixed expenses:
selling administrative expenses	249000	249000
fixed manufacturing overhead	308000	308000
net operating income	123000	523000

NOTES:

a) variable cost of goods sold=units sold x $20 per unit

b)  variable selling and administrative expenses=units sold x $3

3)Reconcilation of  the absorption costing and the variable costing net operating income figures for each year

	YEAR 1	YEAR 2
PARTICULARS	AMOUNT($)	AMOUNT($)
absorption costing net income	193000	453000
variable costing net income	123000	523000