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)	$	976,000		$	1,586,000
Cost of goods sold (@ $34 per unit)		544,000			884,000
Gross margin		432,000			702,000
Selling and administrative expenses*		301,000			331,000
Net operating income	$	\131,000\		$	371,000

* $3 per unit variable; $253,000 fixed each year.

The company’s $34 unit product cost is computed as follows:

Direct materials	$	10
Direct labor		10
Variable manufacturing overhead		3
Fixed manufacturing overhead ($231,000 ÷ 21,000 units)		11
Absorption costing unit product cost	$	34

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	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.

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Variable costing net operating income (loss) Absorption costing net operating income

use the above table as it is to reconcile please

Answer 1

Compute the Variable costing Unit Product cost
				Year 1	Year 2
Direct Material				10	10
Direct labour				10	10
Variable Manufacturing overheads				3	3
Variable costing unit prroduct cost				23	23
Construct The Variable Costing Income Statement under FIFO
				YEAR 1		YEAR 2
Sales					976,000		1,586,000
Less: Variable cost
variable cost of goods sold				368,000		598,000
Variable selling expense				48,000	416,000	78,000	676,000
Contribution margin					560,000		910,000
Fixed expense:
Fixed Manufacturing overheads					231,000		231,000
Fixed selling expense					253,000		253,000
Net operating Income					76,000		426,000
Reconciliation Statement
				YEar1	Year2
Net Income under variable costing				76000	426000
Add: Fixed OH deferred in ending inventry				55000
	(5000 units @ 11)
Less: Fixed OH released in beg inventory					-55000
	(5000 units @ 11)
Net income under absorption costing				131000	371000