During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $25 per unit) $ 1,000,000 $ 1,250,000 Cost of goods sold (@ $18 per unit) 720,000 900,000 Gross margin 280,000 350,000 Selling and administrative expenses* 210,000 230,000 Net operating income $ 70,000 $ 120,000 *$2 per unit variable; $130,000 fixed each year. The company’s $18 unit product cost is computed as follows: Direct materials $ 4 Direct labor 7 Variable manufacturing overhead 1 Fixed manufacturing overhead ($270,000 ÷ 45,000 units) 6 Absorption costing unit product cost $ 18 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 45,000 45,000 Units sold 40,000 50,000 Compute: 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. Compute the absorption costing and the variable costing net operating income figures for each year.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

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 (@ $25 per unit)	$	1,000,000		$	1,250,000
Cost of goods sold (@ $18 per unit)		720,000			900,000
Gross margin		280,000			350,000
Selling and administrative expenses*		210,000			230,000
Net operating income	$	70,000		$	120,000

*$2 per unit variable; $130,000 fixed each year.

The company’s $18 unit product cost is computed as follows:

Direct materials	$	4
Direct labor		7
Variable manufacturing overhead		1
Fixed manufacturing overhead ($270,000 ÷ 45,000 units)		6
Absorption costing unit product cost	$	18

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	45,000	45,000
Units sold	40,000	50,000

Compute:

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. Compute the absorption costing and the variable costing net operating income figures for each year.

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