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During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $63 per

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

Year 1 Year 2
Sales (@ $63 per unit) $ 1,197,000 $ 1,827,000
Cost of goods sold (@ $43 per unit) 817,000 1,247,000
Gross margin 380,000 580,000
Selling and administrative expenses* 309,000 339,000
Net operating income $ 71,000 $ 241,000

* $3 per unit variable; $252,000 fixed each year.

The companys $43 unit product cost is computed as follows:

Direct materials $ 8
Direct labor 13
Variable manufacturing overhead 2
Fixed manufacturing overhead ($480,000 24,000 units) 20
Absorption costing unit product cost $ 43

Production and cost data for the first two years of operations are:

Year 1 Year 2
Units produced 24,000 24,000
Units sold 19,000 29,000

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.

Required 3

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

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Year 1 Year 2
Variable costing net operating income (loss)
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing
Absorption costing net operating income

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