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)	$	992,000		$	1,612,000
Cost of goods sold (@ $44 per unit)		704,000			1,144,000
Gross margin		288,000			468,000
Selling and administrative expenses*		302,000			332,000
Net operating income	$	(14,000)		$	136,000

* $3 per unit variable; $254,000 fixed each year.

The companys $44 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		13
Variable manufacturing overhead		5
Fixed manufacturing overhead ($378,000 21,000 units)		18
Absorption costing unit product cost	$	44

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	21,000	21,000
Units sold	16,000	26,000

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.

• 2
• Required 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)
Absorption costing net operating income