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)	$	1,220,000		$	1,830,000
Cost of goods sold (@ $35 per unit)		700,000			1,050,000
Gross margin		520,000			780,000
Selling and administrative expenses*		311,000			341,000
Net operating income	$	\209,000\		$	439,000

* $3 per unit variable; $251,000 fixed each year.

The company’s $35 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		10
Variable manufacturing overhead		3
Fixed manufacturing overhead ($350,000 ÷ 25,000 units)		14
Absorption costing unit product cost	$	35

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	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.

Answer 1