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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 1Year 2
Sales (@ $61 per unit)$915,000$1,525,000
Cost of goods sold (@ $39 per unit)585,000975,000
Gross margin330,000550,000
Selling and administrative expenses*298,000328,000
Net operating income$32,000$222,000

* $3 per unit variable; $253,000 fixed each year.

The company’s $39 unit product cost is computed as follows:

Direct materials$6
Direct labor9
Variable manufacturing overhead5
Fixed manufacturing overhead ($380,000 ÷ 20,000 units)19
Absorption costing unit product cost$39

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 1Year 2
Units produced20,00020,000
Units sold15,00025,000

Required:

1. Using variable costing, what is the unit product cost forboth years?

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.

Answer & Explanation Solved by verified expert
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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