During Heaton Companys first two years of operations it repo

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

* $3 per unit variable; $250,000 fixed each year.

The company’s $30 unit product cost is computed as follows:

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 operatons are:

Required:

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.

	Year 1		Year 2
Sales (@ $61 per unit)	$	1,220,000		$	1,830,000
Cost of goods sold (@ $30 per unit)		600,000			900,000
Gross margin		620,000			930,000
Selling and administrative expenses*		310,000			340,000
Net operating income	$	\\310,000\\		$	590,000

Solution

Answer 2 Calculation of variable costing net operating income Year 1 Year 2 Sales $1,220,000 $1,830,000 Less : Variable costs - Production costs [$19 per unit] $380,000 $570,000 - Selling and admin costs [$3 per unit] $60,000 $90,000 Contribution Margin $780,000 $1,170,000 Less : Fixed Costs - Production costs $275,000 $275,000 - Selling and admin costs $250,000 $250,000 Net Operating Income $255,000 $645,000 Answer 3 Reconcile the absorption costing and the variable costing net operating income figures for each year. Year 1 Year 2 Absorption costing net operating income $310,000 $590,000 Less : Fixed manufacturing overheads included in closing inventories [5000 units * $11] $55,000 $0 Add : Fixed manufacturing overheads included in opening inventories $0 $55,000 Variable costing net operating income $255,000 $645,000