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) $ 1,008,000 $ 1,638,000 Cost of goods sold (@ $32 per unit) 512,000 832,000 Gross margin 496,000 806,000 Selling and administrative expenses* 302,000 332,000 Net operating income $ 194,000 $ 474,000 * $3 per unit variable; $254,000 fixed each year. The company’s $32 unit product cost is computed as follows: Direct materials $ 8 Direct labor 10 Variable manufacturing overhead 2 Fixed manufacturing overhead ($252,000 ÷ 21,000 units) 12 Absorption costing unit product cost $ 32
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) $ 1,008,000 $ 1,638,000 Cost of goods sold (@ $32 per unit) 512,000 832,000 Gross margin 496,000 806,000 Selling and administrative expenses* 302,000 332,000 Net operating income $ 194,000 $ 474,000 * $3 per unit variable; $254,000 fixed each year. The company’s $32 unit product cost is computed as follows: Direct materials $ 8 Direct labor 10 Variable manufacturing overhead 2 Fixed manufacturing overhead ($252,000 ÷ 21,000 units) 12 Absorption costing unit product cost $ 32
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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) | $ 1,008,000 | $ 1,638,000 |
| Cost of goods sold (@ $32 per unit) | 512,000 | 832,000 |
| Gross margin | 496,000 | 806,000 |
| Selling and administrative expenses* | 302,000 | 332,000 |
| Net operating income | $ 194,000 | $ 474,000 |
* $3 per unit variable; $254,000 fixed each year.
The company’s $32 unit product cost is computed as follows:
| Direct materials | $ 8 |
|---|---|
| Direct labor | 10 |
| Variable manufacturing |
2 |
| Fixed manufacturing overhead ($252,000 ÷ 21,000 units) | 12 |
| Absorption costing unit product cost | $ 32 |
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.
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