In: Accounting
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) | $ | 1,071,000 | $ | 1,701,000 | |
Cost of goods sold (@ $36 per unit) | 612,000 | 972,000 | |||
Gross margin | 459,000 | 729,000 | |||
Selling and administrative expenses* | 300,000 | 330,000 | |||
Net operating income | $ | 159,000 | $ | 399,000 | |
* $3 per unit variable; $249,000 fixed each year.
The company’s $36 unit product cost is computed as follows:
Direct materials | $ | 6 |
Direct labor | 11 | |
Variable manufacturing overhead | 5 | |
Fixed manufacturing overhead ($308,000 ÷ 22,000 units) | 14 | |
Absorption costing unit product cost | $ | 36 |
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 | 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.
1.
The unit product cost under variable costing is computed as follows | ||
Particulars | Year 1 | Year 2 |
Direct material per unit (A) | 6 | 6 |
Direct labour per unit (B) | 11 | 11 |
Variable manufacturing overhead per unit ( C) | 5 | 5 |
Unit Product Cost under Variable Costing (A+B+C) | 22 | 22 |
2.
Variable Costing Income Statement | |
Particular | Year 1 |
Sales (17000 units * $63) | 1071000 |
Less: Variable cost (17000 units*25) | 425000 |
Contribution Margin | 646000 |
Less: Fixed Cost ( 308000+249000) | 557000 |
Net Operating Income | 89000 |
Particular | Year 2 |
Sales (27000 units * $63) | 1701000 |
Less: Variable cost (27000 units*25) | 675000 |
Contribution Margin | 1026000 |
Less: Fixed Cost ( 308000+249000) | 557000 |
Net Operating Income | 469000 |
3.
The reconciliation of absorption and variable costing follows: | ||
Particular | Year 1 | Year 2 |
Income under variable costing | 89000 | 469000 |
Less: Fixed Overhead absorbed (released) | 70000 | (70000) |
Income under Absorption costing | 159000 | 399000 |