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) $ 1,159,000 $ 1,769,000
Cost of goods sold (@ $39 per unit) 741,000 1,131,000
Gross margin 418,000 638,000
Selling and administrative expenses* 311,000 341,000
Net operating income $ \107,000\ $ 297,000

* $3 per unit variable; $254,000 fixed each year.

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

Direct materials $ 7
Direct labor 13
Variable manufacturing overhead 3
Fixed manufacturing overhead ($384,000 ÷ 24,000 units) 16
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.

Solutions

Expert Solution

1
Year 1 Year 2
Direct materials 7 7
Direct labor 13 13
Variable manufacturing overhead 3 3
Unit product cost 23 23
Unit product cost = $23
2
Year 1 Year 2
Sales 1159000 1769000
Variable expenses:
Variable cost of goods sold 437000 667000
Variable selling and administrative expenses 57000 87000
Total Variable expenses 494000 754000
Contribution margin 665000 1015000
Fixed expenses:
Fixed manufacturing overhead 384000 384000
Fixed selling and administrative expenses 254000 254000
Total Fixed expenses 638000 638000
Net operating income(loss) 27000 377000
3
Year 1 Year 2
Variable costing net income (loss) 27000 377000
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 107000 297000

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