Question

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)	$	1,054,000		$	1,674,000
Cost of goods sold (@ $39 per unit)		663,000			1,053,000
Gross margin		391,000			621,000
Selling and administrative expenses*		305,000			335,000
Net operating income	$	86,000		$	286,000

* $3 per unit variable; $254,000 fixed each year.

The company’s $39 unit product cost is computed as follows:

Direct materials	$	6
Direct labor		9
Variable manufacturing overhead		4
Fixed manufacturing overhead ($440,000 ÷ 22,000 units)		20
Absorption costing unit product cost	$	39

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	22,000	22,000
Units sold	17,000	27,000

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.

	Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Variable costing net operating income (loss) Absorption costing net operating income

Answer 1