Question

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)	$	915,000		$	1,525,000
Cost of goods sold (@ $41 per unit)		615,000			1,025,000
Gross margin		300,000			500,000
Selling and administrative expenses*		292,000			322,000
Net operating income	$	8,000		$	178,000

* $3 per unit variable; $247,000 fixed each year.

The company’s $41 unit product cost is computed as follows:

Direct materials	$	10
Direct labor		10
Variable manufacturing overhead		4
Fixed manufacturing overhead ($340,000 ÷ 20,000 units)		17
Absorption costing unit product cost	$	41

Production and cost data for the first two years of operations are:

	Year 1	Year 2
Units produced	20,000	20,000
Units sold	15,000	25,000

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

WORKING NOTES : 1	Year 1	Year 2
	beginning Inventory	-	5,000
	Unit Produced =	20,000	20,000
	Unit Sold =	15,000	25,000
	Closing Stock	5,000	-
Solution: 1
	CALCUALTION OF cost of production units by using Variable Costing for year 1 & Year 2
	Particulars	Variable Costing Amount
	Direct Materials	$                    10.00
	Direct Labor	$                    10.00
	Variable Manufacturing Overhead	$                       4.00
	Fixed Manufacturing Overhead (Not Taken in variable Cost)	$                           -
	Cost of Production per unit	$                    24.00
Solution: 2
	VARIABLE COSTING INCOME STATEMENTS	Variable Costing	Variable Costing
	Particulars	Year 1	Year 2
	Sales	$                915,000	$            1,525,000
	Cost of Goods Sold
	Beginning inventory (5,000 Units X $ 24)	$                           -	$                120,000
	Cost of Goods Manufactured (20000 Units X $ 24)	$                480,000	$                480,000
	Ending inventory (5000 Units X $ 24)	$                120,000
	Cost of Goods Sold	$                360,000	$                600,000
	Variable Selling Expenses (15,000 X $ 3) ( 25,000 Units X $ 3)	$                  45,000	$                  75,000
	Gross Profit	$                510,000	$                850,000
	Less: Fixed Cost
	Fixed Manufacturing overhead	$                340,000	$                340,000
	Fixed Selling Expenses	$                247,000	$                247,000
	Net Income	$                -77,000	$                263,000
SOLUTION = 3
	RECONCILIATION OF VARIABLE COSTING INCOME AND ABSOTPION COSTING INCOME
		YEAR 1	YEAR 2
	Variable Costing Net Operating Income	$                -77,000	$                263,000
	Add: Fixed Cost included in Ending inventory(5000 Units X $ 17)	$                  85,000	$                            -
	Less : Fixed Cost included in Beginning inventory(5000 Units X $ 19)	$                           -	$                  85,000
	Absorption Costing Net Operating income	$                    8,000	$                178,000