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)	$	1,197,000		$	1,827,000
Cost of goods sold (@ $33 per unit)		627,000			957,000
Gross margin		570,000			870,000
Selling and administrative expenses*		305,000			335,000
Net operating income	$	265,000		$	535,000

* $3 per unit variable; $248,000 fixed each year.

The company’s $33 unit product cost is computed as follows:

Direct materials	$	6
Direct labor		8
Variable manufacturing overhead		2
Fixed manufacturing overhead ($408,000 ÷ 24,000 units)		17
Absorption costing unit product cost	$	33

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

	Year 1	Year 2
Units produced	24,000	24,000
Units sold	19,000	29,000

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