Question
During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $62 per
During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows:
Year 1 | Year 2 | ||||
Sales (@ $62 per unit) | $ | 1,116,000 | $ | 1,736,000 | |
Cost of goods sold (@ $42 per unit) | 756,000 | 1,176,000 | |||
Gross margin | 360,000 | 560,000 | |||
Selling and administrative expenses* | 309,000 | 339,000 | |||
Net operating income | $ | \51,000\ | $ | 221,000 | |
* $3 per unit variable; $255,000 fixed each year.
The companys $42 unit product cost is computed as follows:
Direct materials | $ | 7 |
Direct labor | 13 | |
Variable manufacturing overhead | 5 | |
Fixed manufacturing overhead ($391,000 23,000 units) | 17 | |
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.
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