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

	Year 1			Year 2
Sales (@ $62 per unit)	$	1,240,000		$	1,860,000
Cost of goods sold (@ $34 per unit)		680,000			1,020,000
Gross margin		560,000			840,000
Selling and administrative expenses*		311,000			341,000
Net operating income	$	\249,000\		$	499,000

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

The companys $34 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		8
Variable manufacturing overhead		1
Fixed manufacturing overhead ($450,000 25,000 units)		18
Absorption costing unit product cost	$	34

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?

Unit product cost

2. What is the variable costing net operating income in Year 1 and in Year 2?

Net operating income (loss)

Year 1

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

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