Question

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

	Year 1			Year 2
Sales (@ $63 per unit)	$	1,008,000		$	1,638,000
Cost of goods sold (@ $32 per unit)		512,000			832,000
Gross margin		496,000			806,000
Selling and administrative expenses*		303,000			333,000
Net operating income	$	193,000		$	473,000

* $3 per unit variable; $255,000 fixed each year.

The company’s $32 unit product cost is computed as follows:

Direct materials	$	5
Direct labor		12
Variable manufacturing overhead		4
Fixed manufacturing overhead ($231,000 ÷ 21,000 units)		11
Absorption costing unit product cost	$	32

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

	Year 1	Year 2
Units produced	21,000	21,000
Units sold	16,000	26,000

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