Question

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $61 per unit) $ 1,159,000 $ 1,769,000 Cost of goods sold (@ $32 per unit) 608,000 928,000 Gross margin 551,000 841,000 Selling and administrative expenses* 304,000 334,000 Net operating income $ 247,000 $ 507,000 * $3 per unit variable; $247,000 fixed each year. The company’s $32 unit product cost is computed as follows: Direct materials $ 6 Direct labor 9 Variable manufacturing overhead 5 Fixed manufacturing overhead ($288,000 ÷ 24,000 units) 12 Absorption costing unit product cost $ 32 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

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

Answer to Requirement 1.
Year 1:
Unit Product Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Unit Product Cost = $6 + $9 + $5
Unit Product Cost = $20

Year 2:
Unit Product Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Unit Product Cost = $6 + $9 + $5
Unit Product Cost = $20