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

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Accounting

During HeatonCompany’s first two years of operations, it reported absorptioncosting net operating income as follows:

Year 1Year 2
Sales (@ $62 perunit)$930,000$1,550,000
Cost of goodssold (@ $34 per unit)510,000850,000
Grossmargin420,000700,000
Selling andadministrative expenses*294,000324,000
Net operatingincome$126,000$376,000

* $3 per unitvariable; $249,000 fixed each year.

The company’s $34 unitproduct cost is computed as follows:

Direct materials$7
Directlabor10
Variablemanufacturing overhead4
Fixedmanufacturing overhead ($260,000 ÷ 20,000 units)13
Absorptioncosting unit product cost$34

Forty percent of fixedmanufacturing overhead consists of wages and salaries; theremainder consists of depreciation charges on production equipmentand buildings.

Production and costdata for the first two years of operations are:

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

Required:

1. Using variablecosting, what is the unit product cost for both years?

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

3. Reconcile theabsorption costing and the variable costing net operating incomefigures for each year.

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