Question
During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $64 per
During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows:
Year 1 Year 2 Sales (@ $64 per unit) $ 1,152,000 $ 1,792,000
Cost of goods sold (@ $38 per unit) 684,000 1,064,000
Gross margin 468,000 728,000
Selling and administrative expenses* 307,000 337,000
Net operating income $ \161,000\ $ 391,000
* $3 per unit variable; $253,000 fixed each year.
The companys $38 unit product cost is computed as follows:
Direct materials $ 8
Direct labor $13
Variable manufacturing overhead $4
Fixed manufacturing overhead ($299,000 23,000 units) $13
Absorption costing unit product cost $ 38
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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