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)	$	1,037,000		$	1,647,000
Cost of goods sold (@ $40 per unit)		680,000			1,080,000
Gross margin		357,000			567,000
Selling and administrative expenses*		298,000			328,000
Net operating income	$	\59,000\		$	239,000

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

The company’s $40 unit product cost is computed as follows:

Direct materials	$	10
Direct labor		11
Variable manufacturing overhead		2
Fixed manufacturing overhead ($374,000 ÷ 22,000 units)		17
Absorption costing unit product cost	$	40

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 operatons are:

	Year 1	Year 2
Units produced	22,000	22,000
Units sold	17,000	27,000

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

ans 1	Using variable costing, what is the unit product cost for both years?
	Direct materials	10
	Direct labor	11
	Variable manufacturing overhead	2
	Variable unit cost	23
ans 2	What is the variable costing net operating income in Year 1 and in Year 2?
	Unit sold	17000	27000
		Year 1	Year 2
	Sales (@ $61 per unit)	1,037,000	1,647,000
	Less : Variable cost of production @ 23 per unit	391,000	621,000
	Less : Variable selling and administrative cost @ 3 per unit	51,000	81,000
	Total variable expenses	442,000	702,000
	Contribution margin	595,000	945,000
	Less : Fixed cost
	fixed manufacturing expenses	374000	374000
	Fixed selling and administrative expense	247000	247000
	Total fixed cost	621000	621000
	Net operating income	-26,000	324,000
ans 3	Reconcile the absorption costing and the variable costing net operating income figures for each year.
		year 1	year 2
	Beginning inventory	0	5000
	Unit produced	22000	22000
	Unit sold	17000	27000
	ending inventory	5000	0
	Reconciliation statement
		year 1	year 2
	Fixed OH in ending inventory 5000*(40-23)	85000	0
	Less :Fixed OH in beginning inventory	0	85000
A	Deferred Manufcturing OH expenses	85000	-85000
B	Net operating income under Variable costing	-26,000	324,000
C=A+B	Net operating income under Absorption costing	59,000	239,000