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

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Accounting

During Heaton Company’s first two years of operations, itreported 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 (@ $35 per unit) 700,000 1,050,000
Gross margin 540,000 810,000
Selling and administrative expenses* 315,000 345,000
Net operating income $ 225,000 $ 465,000
* $3 per unit variable; $255,000 fixed each year.
The company’s $35 unit product cost is computed as follows:
Direct materials $ 8
Direct labor 9
Variable manufacturing overhead 3
Fixed manufacturing overhead ($375,000 ÷ 25,000 units) 15
Absorption costing unit product cost $ 35
Forty percent of fixed manufacturing overhead consists of wagesand salaries; the remainder consists of depreciation charges onproduction equipment and buildings.
Production and cost data for the first two years of operationsare:
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 forboth years? =$20
2. What is the variable costing net operating income in Year 1and in Year 2?
3. Reconcile the absorption costing and the variable costing netoperating income figures for each year.

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2 Heaton Company Variable costing income statement Year 1 Year 2 Sales 62 per unit 1240000 1860000 Variable expense Direct material 200008 160000 300008 240000 Direct labour 200009 180000 300009 See Answer

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	Year 1		Year 2
Sales (@ $62 per unit)	$	1,240,000	$	1,860,000
Cost of goods sold (@ $35 per unit)		700,000		1,050,000
Gross margin		540,000		810,000
Selling and administrative expenses*		315,000		345,000
Net operating income	$	225,000	$	465,000


Direct materials	$	8
Direct labor		9
Variable manufacturing overhead		3
Fixed manufacturing overhead ($375,000 ÷ 25,000 units)		15
Absorption costing unit product cost	$	35

	Year 1	Year 2
Units produced	25,000	25,000
Units sold	20,000	30,000