During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:  Year 1 Year 2Sales (@ $64 per unit)$1,088,000 $1,728,000Cost of goods sold (@ $35 per unit) 595,000  945,000Gross margin 493,000  783,000Selling and administrative expenses* 303,000  333,000Net operating income$190,000 $450,000  * $3 per unit variable; $252,000 fixed each year. The company’s $35 unit product cost is computed as follows:    Direct materials$8Direct labor 12Variable manufacturing overhead 2Fixed manufacturing overhead ($286,000 ÷ 22,000 units) 13Absorption costing unit product cost$35  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 1Year 2Units produced22,00022,000Units sold17,00027,000  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.

Question
Asked Mar 25, 2019
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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 (@ $64 per unit) $ 1,088,000   $ 1,728,000
Cost of goods sold (@ $35 per unit)   595,000     945,000
Gross margin   493,000     783,000
Selling and administrative expenses*   303,000     333,000
Net operating income $ 190,000   $ 450,000
 

 

* $3 per unit variable; $252,000 fixed each year.

 

The company’s $35 unit product cost is computed as follows:

 

     
Direct materials $ 8
Direct labor   12
Variable manufacturing overhead   2
Fixed manufacturing overhead ($286,000 ÷ 22,000 units)   13
Absorption costing unit product cost $ 35
 

 

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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Expert Answer

Step 1

1.

 

Variable costing: This is a costing method that includes variable manufacturing costs to compute the unit cost of a product. Variable manufacturing costs include cost of direct materials, cost of direct labor, and cost of variable manufacturing overhead.

Compute the unit product costs for both the years, using variable costing.

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Step 2

2.

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

P...

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