Question

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $64 per unit) $ 1,152,000 $ 1,792,000 Cost of goods sold (@ $39 per unit) 702,000 1,092,000 Gross margin 450,000 700,000 Selling and administrative expenses* 303,000 333,000 Net operating income $ \147,000\ $ 367,000 * $3 per unit variable; $249,000 fixed each year. The company’s $39 unit product cost is computed as follows: Direct materials $ 8 Direct labor 9 Variable manufacturing overhead 5 Fixed manufacturing overhead ($391,000 ÷ 23,000 units) 17 Absorption costing unit product cost $ 39 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 23,000 23,000 Units sold 18,000 28,000 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