Question

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

	Year 1			Year 2
Sales (@ $62 per unit)	$	992,000		$	1,612,000
Cost of goods sold (@ $39 per unit)		624,000			1,014,000
Gross margin		368,000			598,000
Selling and administrative expenses*		301,000			331,000
Net operating income	$	\67,000\		$	267,000

* $3 per unit variable; $253,000 fixed each year.

The company’s $39 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		10
Variable manufacturing overhead		4
Fixed manufacturing overhead ($378,000 ÷ 21,000 units)		18
Absorption costing unit product cost	$	39

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	21,000	21,000
Units sold	16,000	26,000

Required:

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.

2)

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

	Year 1 Year 2 Net operating income (loss)

3)

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) Absorption costing net operating income

Answer 1

Compute the Variable costing Unit Product cost
Direct Material			7
Direct labour			10
Variable Manufacturing overheads	4
Variable costing unit prroduct cost	21
Construct The Variable Costing Income Statement under FIFO
				YEAR 1	YEAR 2
Sales					9,92,000		16,12,000
Less: Variable cost
variable cost of goods sold		3,36,000		5,46,000
Variable selling expense		48,000	3,84,000	78,000	6,24,000
Contribution margin				6,08,000		9,88,000
Fixed expense:
Fixed Manufacturing overheads		3,78,000		3,78,000
Fixed selling expense			2,53,000		2,53,000
Net operating Income			-23,000		3,57,000
Reconciliation Statement
					Year1	YEar2
Net Income as per Variable costing		-23000	357000
Add: Fixed MFg oh deferred in ending inventory	90000
Less: fixed mfg oh released in Beginning inventory		-90000
Net Income as per Absorption costing		67000	267000