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) $ 1,098,000 $ 1,708,000 Cost of goods sold (@ $36 per unit) 648,000 1,008,000 Gross margin 450,000 700,000 Selling and administrative expenses* 305,000 335,000 Net operating income $ 145,000 $ 365,000 * $3 per unit variable; $251,000 fixed each year. The company’s $36 unit product cost is computed as follows: Direct materials $ 7 Direct labor 9 Variable manufacturing overhead 2 Fixed manufacturing overhead ($414,000 ÷ 23,000 units) 18 Absorption costing unit product cost $ 36 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. (I cannot figure out questions 2 and 3. If I could get #2 right, then I could at least attempt #3. I've tried following this solution exactly, but I'm still getting the wrong answer 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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Question

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)	$ 1,098,000	$ 1,708,000
Cost of goods sold (@ $36 per unit)	648,000	1,008,000
Gross margin	450,000	700,000
Selling and administrative expenses*	305,000	335,000
Net operating income	$ 145,000	$ 365,000

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

The company’s $36 unit product cost is computed as follows:

Direct materials	$ 7
Direct labor	9
Variable manufacturing overhead	2
Fixed manufacturing overhead ($414,000 ÷ 23,000 units)	18
Absorption costing unit product cost	$ 36

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.

(I cannot figure out questions 2 and 3. If I could get #2 right, then I could at least attempt #3. I've tried following this solution exactly, but I'm still getting the wrong answer for each year.)

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