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

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

  Year 1   Year 2
Sales (@ $63 per unit) $ 1,134,000   $ 1,764,000
Cost of goods sold (@ $42 per unit)   756,000     1,176,000
Gross margin   378,000     588,000
Selling and administrative expenses*   308,000     338,000
Net operating income $ 70,000   $ 250,000
 

* $3 per unit variable; $254,000 fixed each year.

The company’s $42 unit product cost is computed as follows:

     
Direct materials $ 9
Direct labor   13
Variable manufacturing overhead   4
Fixed manufacturing overhead ($368,000 ÷ 23,000 units)   16
Absorption costing unit product cost $ 42
 

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 operatons are:

  Year 1 Year 2
Units produced 23,000 23,000
Units sold 18,000 28,000
 

Required:

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

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

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Apr 04 2020 View more View Less

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