Question
During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $60 per
During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows:
Year 1 Year 2 Sales (@ $60 per unit) $ 1,080,000 $ 1,680,000 Cost of goods sold (@ $36 per unit) 648,000 1,008,000 Gross margin 432,000 672,000 Selling and administrative expenses* 305,000 335,000 Net operating income $ 127,000 $ 337,000
* $3 per unit variable; $251,000 fixed each year.
The company's $36 unit product cost is computed as follows:
Direct materials $ 9 Direct labor 12 Variable manufacturing overhead 4 Fixed manufacturing overhead ($253,000 23,000 units) 11 Absorption costing unit product cost $ 36
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 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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