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)	$	1,054,000		$	1,674,000
Cost of goods sold (@ $38 per unit)		646,000			1,026,000
Gross margin		408,000			648,000
Selling and administrative expenses*		302,000			332,000
Net operating income	$	\106,000\		$	316,000

* $3 per unit variable; $251,000 fixed each year.

The company’s $38 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		10
Variable manufacturing overhead		4
Fixed manufacturing overhead ($374,000 ÷ 22,000 units)		17
Absorption costing unit product cost	$	38

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	22,000	22,000
Units sold	17,000	27,000

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				10
	variable manufacturing overhead				4
	unit product cost under variable costing				21
	for both years $21 is the unit product cost
2)		Heaton /company
	Varible costing income statement
					year 1	year 2
	Sales				1,054,000	1,674,000
	Variable expenses:
	Variable cost of goods sold				357000	567000
	Variable selling & adm expense				51000	81000
	total variable expense				408000	648000
	Contribution margin				646,000	1,026,000
	fixed expenses:
	fixed manufacturing overhead				374,000	374,000
	Fixed selling and adm expense				251,000	251,000
	total fixed expense				625,000	625,000
	net operating income				21,000	401,000
3)
	Reconcilation
						year 1	year 2
	Variable costing net income					21,000	401,000
	Add Fixed oh deferred(released) in ending inventory					85,000	-85,000
	Absorption costing net income					106,000	316,000
	fixed overhead deferred (released)= ending inventory *FOH per unit
				5000*17=	85,000
3)				OR
	Reconcilation
						year 1	year 2
	Variable costing net income					21,000	401,000
	Add Fixed oh deferred in ending inventory					85,000
	less:fixed on released in ending invnetory						-85,000
	Absorption costing net income					106,000	316,000