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 (@ $29 per unit) 522,000 812,000 Gross margin 576,000 896,000 Selling and administrative expenses* 299,000 329,000 Net operating income $ 277,000 $ 567,000 * $3 per unit variable; $245,000 fixed each year. The company’s $29 unit product cost is computed as follows: Direct materials $ 5 Direct labor 8 Variable manufacturing overhead 1 Fixed manufacturing overhead ($345,000 ÷ 23,000 units) 15 Absorption costing unit product cost $ 29 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 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.Using Variable Costing the unit product cost for both years are as follows:

Particulars Year 1 Year 2

Direct Material $5 $5

Direct Labour $8 $8

Variable Mfg O/H $1 $1

Unit Product Cost $14 $14

2. Variable Costing Net Operating Income

Particulars Year 1 Year 2

Units Sold 18000 28000

Sales ($61 per unit) 1098000 1708000

Less: Direct Material ($5) (90000) (140000)

Less:Direct Labour($8) (144000) (224000)

Less:variable mfg O/H($1) (18000) (28000)

Less: Selling/Admin Exp($3) (54000) (84000)

Contribution 792000 1232000

Less:Fixed Mfg O/H 345000 345000

Less: Selling Adm Expense 245000 245000

Net Operating Income 202000 642000

3. Reconciliation:

Particulars Year 1 Year 2

Net Income(Variable Costing) 202000 642000

Add:Fixed O/H(5000*15) 75000   

Less:Fixed O/H(5000*15) (75000)

Net Income (Abs. costing)   277000 567000

Note:*Units Produced-Sold=23000-18000=5000

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