Question

During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: $ Sales (@ $60 per unit) Cost of goods sold (@ $39 per unit) Gross margin Selling and administrative expenses* Net operating income Year 1 $1,020,000 663,000 357,000 299,000 $ 58,000 Year 2 1,620,000 1,053,000 567,000 329,000 $ 238,000 *$3 per unit variable; $248,000 fixed each year. The company's $39 unit product cost is computed as follows: $ Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($418,000 = 22,000 units) Absorption costing unit product cost onno $ 39 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 two years are: Units produced Units sold Year 1 22,000 17,000 Year 2 22,000 27,000

Answer 1

1. Calculation of Unit cost Under Variable Costing Year 1 Direct Material 6.0 Direct Labour 12.0 Variable Manufacturing Overhead 2.0 Unit Product Cost 20.00 Income Statement Under Variable Costing Year 2 6.0 12.0 2.0 20.00 20 Year 1 1020000 Year 2 1620000 Sales (@60) Variable Expense Variable Cost Of Goods Sold (@20) Variable Selling and Administrative Expense (@3) Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads Fixed Sellingand Administrative Expenses Total fixed Expenses Net Operating Income 340000 51000 391000 629000 540000 81000 621000 999000 418000 248000 666000 -37000 418000 248000 666000 333000

Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Income(Loss) -37000 333000 Add: Fixed Manufacturing Overheads cost Deferred in inventory 95000 LESS: Fixed Manufacturing Overheads cost released From inventory -95000 Absorption Costing Income(loss) 58000 238000 Working Note - 1 Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads = Difference in units * fixed manufacturing OH per unit) Year 1 Year 2 22000 22000 17000 27000 5000 -5000 95,000 -95000