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)	$	945,000		$	1,575,000
Cost of goods sold (@ $29 per unit)		435,000			725,000
Gross margin		510,000			850,000
Selling and administrative expenses*		297,000			327,000
Net operating income	$	\213,000\		$	523,000

* $3 per unit variable; $252,000 fixed each year.

The company’s $29 unit product cost is computed as follows:

Direct materials	$	6
Direct labor		10
Variable manufacturing overhead		2
Fixed manufacturing overhead ($220,000 ÷ 20,000 units)		11
Absorption costing unit product cost	$	29

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	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

1)	unit product cost under variable costing
	Direct materials				6
	direct labor				10
	variable manufacturing overhead				2
	unit product cost under variable costing				18
	for both years $26 is the unit product cost
2)		Heaton /company
	Varible costing income statement
					year 1	year 2
	Sales				945,000	1,575,000
	Variable expenses:
	Variable cost of goods sold				270000	450000
	Variable selling & adm expense				45000	75000
	total variable expense				315000	525000
	Contribution margin				630,000	1,050,000
	fixed expenses:
	fixed manufacturing overhead				220,000	220,000
	Fixed selling and adm expense				252,000	252,000
	total fixed expense				472,000	472,000
	net operating income				158,000	578,000
3)
	Reconcilation
						year 1	year 2
	Variable costing net income					158,000	578,000
	Add Fixed oh deferred(released) in ending inventory					55,000	-55,000
	Absorption costing net income					213,000	523,000
	fixed overhead deferred (released)= ending inventory *FOH per unit
				5000*11=$55,000
	Reconcilation
						year 1	year 2
	Variable costing net income					158,000	578,000
	Add Fixed oh deferred in ending inventory					85000
	less:fixed on released in ending invnetory						-85,000
	Absorption costing net income					243,000	493,000