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)	$	1,098,000		$	1,708,000
Cost of goods sold (@ $38 per unit)		684,000			1,064,000
Gross margin		414,000			644,000
Selling and administrative expenses*		300,000			330,000
Net operating income	$	\114,000\		$	314,000

* $3 per unit variable; $246,000 fixed each year.

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

Direct materials	$	9
Direct labor		12
Variable manufacturing overhead		4
Fixed manufacturing overhead ($299,000 ÷ 23,000 units)		13
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 operatons are:

	Year 1	Year 2
Units produced	23,000	23,000
Units sold	18,000	28,000

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				9
	direct labor				12
	variable manufacturing overhead				4
	unit product cost under variable costing				25
	for both years $26 is the unit product cost
2)		Heaton /company
	Varible costing income statement
					year 1	year 2
	Sales				1,098,000	1,708,000
	Variable expenses:
	Variable cost of goods sold				450000	700000
	Variable selling & adm expense				54000	84000
	total variable expense				504000	784000
	Contribution margin				594,000	924,000
	fixed expenses:
	fixed manufacturing overhead				299,000	299,000
	Fixed selling and adm expense				246,000	246,000
	total fixed expense				545,000	545,000
	net operating income				49,000	379,000
3)
	Reconcilation
						year 1	year 2
	Variable costing net income					49,000	379,000
	Add Fixed oh deferred(released) in ending inventory					65,000	-65,000
	Absorption costing net income					114,000	314,000
	fixed overhead deferred (released)= ending inventory *FOH per unit
				5000*13=$65,000
	Reconcilation
						year 1	year 2
	Variable costing net income					49,000	379,000
	Add Fixed oh deferred in ending inventory					85000
	less:fixed on released in ending invnetory						-85,000
	Absorption costing net income					134,000	294,000