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In: Finance

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

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 (@ $26 per unit) 494,000 754,000
Gross margin 703,000 1,073,000
Selling and administrative expenses* 304,000 334,000
Net operating income $ 399,000 $ 739,000

* $3 per unit variable; $247,000 fixed each year.

The company’s $26 unit product cost is computed as follows:

Direct materials $ 5
Direct labor 9
Variable manufacturing overhead 1
Fixed manufacturing overhead ($264,000 ÷ 24,000 units) 11
Absorption costing unit product cost $ 26

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 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

Solutions

Expert Solution

2-a. Unit product cost under variable costing = Direct material + Direct labor +variable manufacturing overheads
Year 1 Year 2
Unit product cost 15 15
Variable costing income statement
Units sold 19000 29000
Year 1 Year 2
Sales     1,197,000     1,827,000
Variable expenses
Variable COGS        285,000        435,000
Variable Selling and Admin           57,000           87,000
Total variable expenses        342,000        522,000
Contribution Margin        855,000     1,305,000
Fixed Expenses
Fixed manufacturing overhead        264,000        264,000
Fixed selling and admin        247,000        247,000
Total Fixed expenses        511,000        511,000
Net Operating Income 344000        794,000
Reconciliation
Year 1 Year 2
Variable costing net income        344,000        794,000
Add: Fixed Manufactured overhead cost deferred 5000*264000/24000           55,000
Less: Fixed Manufactured overhead cost released           55,000
Absorption costing net income        399,000        739,000

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