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)	$	900,000		$	1,500,000
Cost of goods sold (@ $45 per unit)		675,000			1,125,000
Gross margin		225,000			375,000
Selling and administrative expenses*		295,000			325,000
Net operating income	$	(70,000)		$	50,000

* $3 per unit variable; $250,000 fixed each year.

The company’s $45 unit product cost is computed as follows:

Direct materials	$	9
Direct labor		12
Variable manufacturing overhead		5
Fixed manufacturing overhead ($380,000 ÷ 20,000 units)		19
Absorption costing unit product cost	$	45

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 operations 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				9
	direct labor				12
	variable manufacturing overhead				5
	unit product cost under variable costing				26
	for both years $26 is the unit product cost
2)		Heaton /company
	Varible costing income statement
					year 1	year 2
	Sales				900,000	1,500,000
	Variable expenses:
	Variable cost of goods sold				390000	650000
	Variable selling & adm expense				45000	75000
	total variable expense				435000	725000
	Contribution margin				465,000	775,000
	fixed expenses:
	fixed manufacturing overhead				380,000	380,000
	Fixed selling and adm expense				250,000	250,000
	total fixed expense				630,000	630,000
	net operating income				-165,000	145,000
3)
	Reconcilation
						year 1	year 2
	Variable costing net income					-165,000	145,000
	Add Fixed oh deferred(released) in ending inventory					95,000	-95,000
	Absorption costing net income					-70,000	50,000
	fixed overhead deferred (released)= ending inventory *FOH per unit
				5000*19=	95,000
	OR
	Reconcilation
						year 1	year 2
	Variable costing net income					-165,000	145,000
	Add Fixed oh deferred in ending inventory					95,000
	less:fixed on released in ending invnetory						-95,000
	Absorption costing net income					-70,000	50,000