Question

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

	Year 1			Year 2
Sales (@ $60 per unit)	$	1,140,000		$	1,740,000
Cost of goods sold (@ $37 per unit)		703,000			1,073,000
Gross margin		437,000			667,000
Selling and administrative expenses*		311,000			341,000
Net operating income	$	126,000		$	326,000

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

The company’s $37 unit product cost is computed as follows:

Direct materials	$	9
Direct labor		11
Variable manufacturing overhead		4
Fixed manufacturing overhead ($312,000 ÷ 24,000 units)		13
Absorption costing unit product cost	$	37

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	24,000	24,000
Units sold	19,000	29,000

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.

Using variable costing, what is the unit product cost for both years?

	Unit product cost

What is the variable costing net operating income in Year 1 and in Year 2? (Loss amounts should be indicated with a minus sign.)
	Year 1 Year 2 Net operating income (loss)

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

Answer 1

ANSWERS Variable Costing Units cost 1 Units Product Cost Variable Costing Unit cost and Net Operating income 2 Net Operating Income 24 Year 1 61000 391000 Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Income(Loss) 61000 391000 Add: Fixed Manufacturing Overheads cost Deferred in inventory 65000 LESS: Fixed Manufacturing Overheads cost released From inventory -65000 Absorption Costing Income(loss) 126000 326000 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 24000 24000 19000 29000 5000 -5000 65,000 -65000

4.0 4.01 1. Calculation of Unit cost Under Variable Costing Year 1 Year 2 Direct Material 9.01 9.0 Direct Labour 11.0 11.0 Variable Manufacturing Overhead Unit Product Cost 24.00 24.00 Income Statement Under Variable Costing Year 1 Year 2 Sales (@60) 1140000 1740000 Variable Expense Variable Cost Of Goods Sold (@24) 456000 696000 Variable Selling and Administrative Expense (@3) 57000 87000 Total Varible Expenses 513000 783000 Contribution Magin 627000 957000 Fixed Expenses Fixed mufacturing Overheads 312000 312000 Fixed Sellingand Administrative Expenses 254000 254000 Total fixed Expenses 566000 566000 Net Operating Income 61000 391000