Question

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

	Year 1			Year 2
Sales (@ $60 per unit)	$	960,000		$	1,560,000
Cost of goods sold (@ $35 per unit)		560,000			910,000
Gross margin		400,000			650,000
Selling and administrative expenses*		297,000			327,000
Net operating income	$	\103,000\		$	323,000

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

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

Direct materials	$	6
Direct labor		12
Variable manufacturing overhead		4
Fixed manufacturing overhead ($273,000 ÷ 21,000 units)		13
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	21,000	21,000
Units sold	16,000	26,000

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

Answer 1.

Year 1:

Cost per unit = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Cost per unit = $6 + $12 + $4
Cost per unit = $22

Year 2:

Cost per unit = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Cost per unit = $6 + $12 + $4
Cost per unit = $22

Answer 2.

Answer 3.