In: Finance
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
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 |