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)	$	1,260,000		$	1,890,000
Cost of goods sold (@ $31 per unit)		620,000			930,000
Gross margin		640,000			960,000
Selling and administrative expenses*		312,000			342,000
Net operating income	$	\328,000\		$	618,000

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

The company’s $31 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		10
Variable manufacturing overhead		3
Fixed manufacturing overhead ($275,000 ÷ 25,000 units)		11
Absorption costing unit product cost	$	31

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	25,000	25,000
Units sold	20,000	30,000

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.

B. What is the variable costing net operating income in Year 1 and in Year 2?

	Year 1 Year 2 Net operating income (loss)

C.

Reconcile the absorption costing and the variable costing net operating income figures for each year. (Enter any losses or deductions as a negative value.)

	Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Variable costing net operating income (loss) Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing Less: Fixed manufacturing overhead cost released from inventory under absorption costing Absorption costing net operating income

Answer 1

1
	Year 1	Year 2
Direct materials	7	7
Direct labor	10	10
Variable manufacturing overhead	3	3
Unit product cost	20	20
2
	Year 1	Year 2
Sales	1260000	1890000
Variable expenses:
Variable cost of goods sold	400000	600000
Selling and administrative expenses	60000	90000
Total Variable expenses	460000	690000
Contribution margin	800000	1200000
Fixed expenses:
Fixed manufacturing overhead	275000	275000
Selling and administrative expenses	252000	252000
Total Fixed expenses	527000	527000
Net operating income	273000	673000
3
	Year 1	Year 2
Variable costing net operating income (loss)	273000	673000
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing	55000
Less: Fixed manufacturing overhead cost released from inventory under absorption costing		55000
Absorption costing net operating income	328000	618000