During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows: Year 1Year 2Sales (@ $61 per unit)$ 976,000$ 1,586,000Cost of goods sold (@ $38 per unit)608,000988,000Gross margin368,000598,000Selling and administrative expenses*299,000329,000Net operating income$ 69,000$ 269,000 * $3 per unit variable; $251,000 fixed each year. The company’s $38 unit product cost is computed as follows: Direct materials$ 7Direct labor12Variable manufacturing overhead4Fixed manufacturing overhead ($315,000 ÷ 21,000 units)15Absorption costing unit product cost$ 38 Production and cost data for the first two years of operations are: Year 1Year 2Units produced21,00021,000Units sold16,00026,000 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.

Absorption costing and variable costing are defined as two method of calculating net profit. There…

Answered: During Heaton Company’s first two years…

Cornerstones of Cost Management (Cornerstones Series)

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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 (@ $61 per unit)	$ 976,000	$ 1,586,000
Cost of goods sold (@ $38 per unit)	608,000	988,000
Gross margin	368,000	598,000
Selling and administrative expenses*	299,000	329,000
Net operating income	$ 69,000	$ 269,000

* $3 per unit variable; $251,000 fixed each year.

The company’s $38 unit product cost is computed as follows:

Direct materials	$ 7
Direct labor	12
Variable manufacturing overhead	4
Fixed manufacturing overhead ($315,000 ÷ 21,000 units)	15
Absorption costing unit product cost	$ 38

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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