Question

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

	Year 1			Year 2
Sales (@ $63 per unit)	$	1,134,000		$	1,764,000
Cost of goods sold (@ $27 per unit)		486,000			756,000
Gross margin		648,000			1,008,000
Selling and administrative expenses*		308,000			338,000
Net operating income	$	\340,000\		$	670,000

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

The company’s $27 unit product cost is computed as follows:

Direct materials	$	5
Direct labor		8
Variable manufacturing overhead		2
Fixed manufacturing overhead ($276,000 ÷ 23,000 units)		12
Absorption costing unit product cost	$	27

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.

Answer 1

SOLUTION: 1
	Caclulation of Unit Cost of Production by using Variable Costing for both year
	Particulars	Amount
		Cost per Unit
	Direct Materials	$                  5.00
	Direct Labor	$                  8.00
	Variable Manufacturing overhead	$                  2.00
	Total Manufacturing Variable Cost	$                15.00
SOLUTION: 2
	VARIABLE COSTING INCOME STATEMENT
		Year 1	Year 2
	Sales	$       11,34,000	$       17,64,000
	Less: Variable Cost of Goods Sold	$          2,70,000	$          4,20,000
		(18,000 X $ 15)	(28,000 X $ 15)
	Manufacturing Margin	$          8,64,000	$       13,44,000
	Less: Variable Sellign and administration expenses	$             54,000	$             84,000
		(18,000 X $ 3)	(28,000 X $ 3)
	Contribution margin	$          8,10,000	$       12,60,000
	Fixed Cost
	Fixed Manufacturing Cost	$          2,76,000	$          2,76,000
	Fixed Selling and adminsitration expenses	$          2,54,000	$          2,54,000
	Total Fixed Cost	$          5,30,000	$          5,30,000
	Net Income	$          2,80,000	$          7,30,000
SOLUTION: 3
	RECONCILIATION OF VARIABLE COSTING NET OPERATING INCOME FIGURE FOR EACH YEAR
		YEAR 1	YEAR 2
	Variable costing net operating income (Loss)	$          2,80,000	$          7,30,000
	Add: Fixed manufacturing overhead deferred in closing inventory (5,000 Units X $ 12 Per unit)	$             60,000
	Less : Fixed manufacturing overhead deferred in Opening inventory (5,000 Units X $ 12 Per unit)		$             60,000
	Absorption costing net operating income	$          3,40,000	$          6,70,000