During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2Sales (@ $60 per unit)$1,200,000 $1,800,000Cost of goods sold (@ $34 per unit) 680,000 1,020,000Gross margin 520,000 780,000Selling and administrative expenses* 308,000 338,000Net operating income$212,000 $442,000 * $3 per unit variable; $248,000 fixed each year. The company’s $34 unit product cost is computed as follows: Direct materials$7Direct labor 9Variable manufacturing overhead 2Fixed manufacturing overhead ($400,000 ÷ 25,000 units) 16Absorption costing unit product cost$34 Production and cost data for the first two years of operations are: Year 1Year 2Units produced25,00025,000Units sold20,00030,000 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.

Particulars Year 1 Year 2 Sales $1,200,000 $1,800,000 divide by: sales price $60 per unit $60…

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 (@ $60 per unit)	$	1,200,000		$	1,800,000
Cost of goods sold (@ $34 per unit)		680,000			1,020,000
Gross margin		520,000			780,000
Selling and administrative expenses*		308,000			338,000
Net operating income	$	212,000		$	442,000

* $3 per unit variable; $248,000 fixed each year.

The company’s $34 unit product cost is computed as follows:


Direct materials	$	7
Direct labor		9
Variable manufacturing overhead		2
Fixed manufacturing overhead ($400,000 ÷ 25,000 units)		16
Absorption costing unit product cost	$	34

Production and cost data for the first two years of operations are:

	Year 1	Year 2
Units produced	25,000	25,000
Units sold	20,000	30,000

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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