Fill in the chart, calculate the net operating incomes.

The net operating incomes are reconciled as follows:

	Year 1	Year 2
Units in beginning inventory.................................................	0	10,000
+ Units produced.................................................................	50,000	40,000
Units sold........................................................................	40,000	50,000
= Units in ending inventory...................................................	10,000	0

	Year 1	Year 2
Fixed manufacturing overhead in ending inventory (x0,000 units $5 per unit)...........................................................	$x0,000	$ 0
Fixed manufacturing overhead in beginning inventory (xx,000 units $5 per unit)................................................		x0,000
= Manufacturing overhead deferred in (released from) inventory.........................................................................	$x0,000	$(x0,000)

	Year 1	Year 2
Variable costing net operating income .................................	$1xx,000	$xxx,000
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing...................................	50,000
Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing...................................		(50,000)
Absorption costing net operating income..............................	$xxx,000	$xxx,000

This is the data needed to fill in the above chart

Under variable costing, only the variable manufacturing costs are included in product costs.

	Year 1	Year 2
Direct materials............................................................	$25	$25
Direct labor..................................................................	15	25
Variable manufacturing overhead...................................	5	5
Variable costing unit product cost.................................	$45	$45

Note that selling and administrative expenses are not treated as product costs; that is, they are not included in the costs that are inventoried. These expenses are always treated as period costs.

1 b.

	Year 1		Year 2
Sales..................................................................................	$2,400,000			$3,000,000
Variable expenses:
Variable cost of goods sold @ $45 per unit.......................	1,800,000			2,250,000
Variable selling and administrative @ $2 per unit................	80,000			100,000
Total variable expenses........................................................	1,880,000			2,350,000
Contribution margin.............................................................	520,000			650,000
Fixed expenses:
Fixed manufacturing overhead..........................................	250,000			250,000
Fixed selling and administrative........................................	80,000			80,000
Total fixed expenses............................................................	330,000			330,000
Net operating income (loss).................................................	$ 190,000	$ 320,000

2 a. The unit product costs under absorption costing:

	Year 1		Year 2
Direct materials...........................................................	$25.00		$25.00
Direct labor.................................................................	15.00		15.00
Variable manufacturing overhead.................................	5.00		5.00
Fixed manufacturing overhead.....................................	5		**6.25
Absorption costing unit product cost...........................	$50		$51.25
* $250,000 50,000 units = $5 per unit.
** $250,000 40,000 units = $6.25 per unit.

2 b. The absorption costing income statements appears below:

	Year 1	Year 2
Sales.....................................................................	$2,400,000	$3,000,000
Cost of goods sold................................................	*2,000,000	**2,550,000
Gross margin.........................................................	400,000	450,000
Selling and administrative expenses........................	160,000	180,000
Net operating income..............................................	$ 240,000	$ 270,000
* 40,000 units $50 per unit = $2,000,000
** (40,000 units $51.25 per unit) + (10,000 units $50 per unit) = $2,550,000