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 (@ $36 per unit) 612,000 972,000 Gross margin 442,000 702,000 Selling and administrative expenses* 303,000 333,000 Net operating income $ \139,000\ $ 369,000 * $3 per unit variable; $252,000 fixed each year. The company’s $36 unit product cost is computed as follows: Direct materials $ 6 Direct labor 11 Variable manufacturing overhead 4 Fixed manufacturing overhead ($330,000 ÷ 22,000 units) 15 Absorption costing unit product cost $ 36 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 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.

Answer 1

1)	unit product cost under variable costing
	Direct materials				6
	direct labor				11
	variable manufacturing overhead				4
	unit product cost under variable costing				21
	for both years $24 is the unit product cost
2)		Heaton /company
	Varible costing income statement
					year 1	year 2
	Sales				1,054,000	1,674,000
	Variable expenses:
	Variable cost of goods sold				357000	567000
	Variable selling & adm expense				51000	81000
	total variable expense				408000	648000
	Contribution margin				646,000	1,026,000
	fixed expenses:
	fixed manufacturing overhead				330,000	330,000
	Fixed selling and adm expense				252,000	252,000
	total fixed expense				582,000	582,000
	net operating income				64,000	444,000
3)
	Reconcilation
						year 1	year 2
	Variable costing net income					64,000	444,000
	Add Fixed oh deferred(released) in ending inventory					75,000	-75,000
	Absorption costing net income					139,000	369,000
	fixed overhead deferred (released)= ending inventory *FOH per unit
				5000*15=	75,000
3)				OR
	Reconcilation
						year 1	year 2
	Variable costing net income					64,000	444,000
	Add Fixed oh deferred in ending inventory					75,000
	less:fixed on released in ending invnetory						-75,000
	Absorption costing net income					139,000	369,000