Question

In: Accounting

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

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 (@ $38 per unit) 608,000 988,000
Gross margin 368,000 598,000
Selling and administrative expenses* 297,000 327,000
Net operating income $ 71,000 $ 271,000

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

The company’s $38 unit product cost is computed as follows:

Direct materials $ 8
Direct labor 12
Variable manufacturing overhead 2
Fixed manufacturing overhead ($336,000 ÷ 21,000 units) 16
Absorption costing unit product cost $ 38

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.

Solutions

Expert Solution

1
Year 1 Year 2
Direct materials 8 8
Direct labor 12 12
Variable manufacturing overhead 2 2
Unit product cost 22 22
Unit product cost = $22
2
Year 1 Year 2
Sales 976000 1586000
Variable expenses:
Variable cost of goods sold 352000 572000
Variable selling and administrative expenses 48000 78000
Total Variable expenses 400000 650000
Contribution margin 576000 936000
Fixed expenses:
Fixed manufacturing overhead 249000 249000
Fixed selling and administrative expenses 336000 336000
Total Fixed expenses 585000 585000
Net operating income(loss) (9000) 351000
3
Year 1 Year 2
Variable costing net operating income(loss) (9000) 351000
Add: Fixed manufacturing overhead deferred in inventory under absorption costing 80000
Deduct: Fixed manufacturing overhead released from inventory under absorption costing (80000)
Absorption costing net operating income 71000 271000

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