During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2Sales (@ $62 per unit)$992,000 $1,612,000Cost of goods sold (@ $35 per unit) 560,000 910,000Gross margin 432,000 702,000Selling and administrative expenses* 300,000 330,000Net operating income$132,000 $372,000 * $3 per unit variable; $252,000 fixed each year. The company’s $35 unit product cost is computed as follows: Direct materials$9Direct labor 9Variable manufacturing overhead 4Fixed manufacturing overhead ($273,000 ÷ 21,000 units) 13Absorption costing unit product cost$35 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.

The term "variable costing" refers to a method of assigning only variable costs to products. This…

Answered: During Heaton Company’s first two years…

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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 (@ $62 per unit)	$	992,000		$	1,612,000
Cost of goods sold (@ $35 per unit)		560,000			910,000
Gross margin		432,000			702,000
Selling and administrative expenses*		300,000			330,000
Net operating income	$	132,000		$	372,000

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

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


Direct materials	$	9
Direct labor		9
Variable manufacturing overhead		4
Fixed manufacturing overhead ($273,000 ÷ 21,000 units)		13
Absorption costing unit product cost	$	35

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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