Question

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

	Year 1			Year 2
Sales (@ $60 per unit)	$	1,140,000		$	1,740,000
Cost of goods sold (@ $41 per unit)		779,000			1,189,000
Gross margin		361,000			551,000
Selling and administrative expenses*		304,000			334,000
Net operating income	$	57,000		$	217,000

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

The company’s $41 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		12
Variable manufacturing overhead		4
Fixed manufacturing overhead ($432,000 ÷ 24,000 units)		18
Absorption costing unit product cost	$	41

Production and cost data for the first two years of operations are:

	Year 1	Year 2
Units produced	24,000	24,000
Units sold	19,000	29,000

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				7
	direct labor				12
	variable manufacturing overhead				4
	unit product cost under variable costing				23
	for both years $23 is the unit product cost
2)		Heaton /company
	Varible costing income statement
					year 1	year 2
	Sales				1,140,000	1,740,000
	Variable expenses:
	Variable cost of goods sold				437000	667000
	Variable selling & adm expense				57000	87000
	total variable expense				494000	754000
	Contribution margin				646,000	986,000
	fixed expenses:
	fixed manufacturing overhead				432,000	432,000
	Fixed selling and adm expense				247,000	247,000
	total fixed expense				679,000	679,000
	net operating income				-33,000	307,000

3)
	Reconcilation
						year 1	year 2
	Variable costing net income					-33,000	307,000
	Add Fixed oh deferred in ending inventory					90,000
	less:fixed on released in ending invnetory						-90,000
	Absorption costing net income					57,000	217,000