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

3.7 Ratings (608 Votes)

1	The unit product cost for both years - Using variable costing

	Direct materials	$6
	Direct labor	$9
	Variable manufacturing overhead	$5
		$20

2	Calculation of net operating income
		Year -1	Year -2
	Units Sold	15,000	25,000

	Sales	$915,000	$1,525,000
	Less: Variable expenses
	Direct materials	$90,000	$150,000
	Direct labor	$135,000	$225,000
	Variable manufacturing overhead	$75,000	$125,000
	Selling and administrative expenses	$45,000	$75,000
	Contribution margin	$570,000	$950,000
	Less: Fixed Expenses
	Variable manufacturing overhead	$380,000	$380,000
	Selling and administrative expenses	$253,000	$253,000
	Net operating income(loss)	-$63,000	$317,000

3	Reconcile the absorption costing and the variable costing net operating income

	Variable costing net operating income(loss)	-$63,000	$317,000
	Add: Fixed manufacturing overhead deferred	$95,000	$0
	in inventory under absorption costing
	(5,000 x $19)
	Less: Fixed manufacturing overhead released	$0	-$95,000
	from inventory under absorption costing
	(5,000 x $19)
	Absorption costing net operating income	$32,000	$222,000

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	Year 1		Year 2
Sales (@ $61 per unit)	$	915,000	$	1,525,000
Cost of goods sold (@ $39 per unit)		585,000		975,000
Gross margin		330,000		550,000
Selling and administrative expenses*		298,000		328,000
Net operating income	$	32,000	$	222,000

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