During Heaton Company’s first two years of operations, it reported absorption costing net operating income as…

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

Year 1

Year 2

Sales (@ $62 per
unit)
$
1,054,000

$
1,674,000

Cost of goods
sold (@ $32 per unit)

544,000

864,000

Gross
margin

510,000

810,000

Selling and
administrative expenses*

298,000

328,000

Net operating
income
$
212,000

$
482,000

* $3 per unit
variable; $247,000 fixed each year.

The company’s $32 unit
product cost is computed as follows:

Direct materials

$

7

Direct
labor

10

Variable
manufacturing overhead

2

Fixed
manufacturing overhead ($286,000 ÷ 22,000 units)

13

Absorption
costing unit product cost
$
32

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

22,000

22,000

Units sold
17,000
27,000

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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