Question

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $63 per unit) $ 1,071,000 $ 1,701,000 Cost of goods sold (@ $37 per unit) 629,000 999,000 Gross margin 442,000 702,000 Selling and administrative expenses* 297,000 327,000 Net operating income $ \145,000\ $ 375,000 * $3 per unit variable; $246,000 fixed each year. The company’s $37 unit product cost is computed as follows: Direct materials $ 9 Direct labor 11 Variable manufacturing overhead 1 Fixed manufacturing overhead ($352,000 ÷ 22,000 units) 16 Absorption costing unit product cost $ 37 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.

Answer 1

Solution 1:

Computation of Unit Product Cost - Variable Costing
Particulars	Year 1	Year 2
Unit Product Cost:
Direct material	$9.00	$9.00
Direct Labor	$11.00	$11.00
Variable manufacturing overhead	$1.00	$1.00
Unit product cost - Variable costing	$21.00	$21.00

Solution 2:

Variable costing contribution format income statement
Particulars	Per Unit	Year 1		Year 2
		Details	Amount	Details	Amount
Sales	$63.00	17000*$63	$1,071,000.00	27000*$63	$1,701,000.00
Variable Cost:
Variable manufacturing cost	$21.00	17000*$21	$357,000.00	27000*$21	$567,000.00
Variable Selling and Administrative Expenses	$3.00	17000*$3	$51,000.00	27000*$3	$81,000.00
Contribution	$39.00		$663,000.00		$1,053,000.00
Fixed Manufacturing Overhead			$352,000.00		$352,000.00
Fixed Selling & Administrative Expenses			$246,000.00		$246,000.00
Net Income			$65,000.00		$455,000.00

Solution 3:

Reconciliation of Net Operating income under absorption costing & Variable Costing
Particulars	Year 1	Year 2
Net Operating Income - Variable Costing	$65,000.00	$455,000.00
Add : Fixed manufacturing overhead deferred in inventory Year 1 - $16*5000 Year 2 - 0	$80,000.00	$0.00
Less: Fixed manufacturing overhead released in inventory Year 1 - 0 Year 2 - $16*5000	$0.00	$80,000.00
Net Operating Income - Absorption Costing	$145,000.00	$375,000.00