Question
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) | $ | 1,071,000 | $ | 1,701,000 | |
Cost of goods sold (@ $30 per unit) | 510,000 | 810,000 | |||
Gross margin | 561,000 | 891,000 | |||
Selling and administrative expenses* | 299,000 | 329,000 | |||
Net operating income | $ | \262,000\ | $ | 562,000 | |
* $3 per unit variable; $248,000 fixed each year.
The companys $30 unit product cost is computed as follows:
Direct materials | $ | 6 |
Direct labor | 8 | |
Variable manufacturing overhead | 1 | |
Fixed manufacturing overhead ($330,000 22,000 units) | 15 | |
Absorption costing unit product cost | $ | 30 |
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 | 22,000 | 22,000 |
Units sold | 17,000 | 27,000 |
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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