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

	Year 1			Year 2
Sales (@ $60 per unit)	$	1,140,000		$	1,740,000
Cost of goods sold (@ $31 per unit)		589,000			899,000
Gross margin		551,000			841,000
Selling and administrative expenses*		303,000			333,000
Net operating income	$	\248,000\		$	508,000

* $3 per unit variable; $246,000 fixed each year.

The companys $31 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		8
Variable manufacturing overhead		1
Fixed manufacturing overhead ($360,000 24,000 units)		15
Absorption costing unit product cost	$	31

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 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.

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

	Unit product cost

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Req 2: What is the variable costing net operating income in Year 1 and in Year 2? (Loss amounts should be indicated with a minus sign.)

	Year 1	Year 2
Net operating income (loss)

_____________________________________________________________________________________________________________________________________________________ Req 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: Fixed manufacturing overhead cost deferred in inventory under absorption costing
Absorption costing net operating income