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. Using variable costing, what is the unit product cost for both years?

Year 1 Year 2
Direct material 5 5
Direct labour 9 9
Variable manufacturing overhead 4 4
Unit product cost 18 18

2. What is the variable costing net operating income in Year 1 and in Year 2?

Year 1 Year 2
Sales 1240000 1860000
Variable cost of goods sold 360000 540000
Variable selling and administrative expense 60000 90000
Total variable cost 420000 630000
Contribution margin 820000 1230000
Fixed manufacturing overhead 475000 475000
Fixed selling and administrative expense 249000 249000
Total fixed cost 724000 724000
Net operating income 96000 506000

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Year 1 Year 2
Absorption costing net income 191000 411000
Fixed manufacturing overhead cost deferred or released in ending inventory (5000*19) -95000 95000
Variable costing net income 96000 506000

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