Question

In: Accounting

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 (@ $62 per unit) $ 1,240,000 $ 1,860,000
Cost of goods sold (@ $37 per unit) 740,000 1,110,000
Gross margin 500,000 750,000
Selling and administrative expenses* 309,000 339,000
Net operating income $ \191,000\ $ 411,000

* $3 per unit variable; $249,000 fixed each year.

The company’s $37 unit product cost is computed as follows:

Direct materials $ 5
Direct labor 9
Variable manufacturing overhead 4
Fixed manufacturing overhead ($475,000 ÷ 25,000 units) 19
Absorption costing unit product cost $ 37

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 operatons are:

Year 1 Year 2
Units produced 25,000 25,000
Units sold 20,000 30,000

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.

Solutions

Expert Solution

1.

Computation of Unit Product Cost
Variable Costing
Direct Meterial $                                        5.00
Direct Labour $                                        9.00
Variable Manufactoring Overhead $                                        4.00
Unit Product Cost $                                      18.00

2.

Income Statement
Variable Costing
Year 1 Year 2
Sales   20,000*$62 = $1,240,000 30,000*$62 = $1,860,000
Less: Variable Expenses:
Direct materials   20,000*$5 = $100,000 30,000*$5 = $150,000
Direct labour 20,000*$9 = $180,000 30,000*$9 = $270,000
Variable manufacturing overhead 20,000*$4 = $80,000 30,000*$4 = $120,000
Variable selling and administrative expenses 20,000*$3 = $60,000 30,000*$3 = $90,000
Contribution margin $                                 820,000 $                             1,230,000
Less: Fixed Expenses:
Fixed manufacturing overhead $                                 475,000 $                                 475,000
Fixed selling and administrative $                                 249,000 $                                 249,000
Net Operating Income (loss) $                                   96,000 $                                 506,000

3.

Reconciliation
Year 1 Year 2
Net Income (Variable costing) $                           96,000 $                        506,000
Add: Fixed Manufacturing overhead carried forward (closing inventories) 5,000*$19 = $95,000
Less: Fixed Manufacturing overhead brought in (opening inventories) 5,000*$19 = $95,000
Net Income (Absorption Costing) $                        191,000 $                        411,000

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