Reference no: EM132472516

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)                                              $960,000                        $1,560,000

Cost of goods sold (@ $34 per unit)                               544,000                           884,000

Gross margin                                                              416,000                            676,000

Selling and administrative expenses                                302,000                            332,000

Net operating income                                                   $114,000                        $344,000

• $3 per unit variable; $254,000 fixed each year.

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

Direct materials                                                            $6

Direct labor                                                                  12

Variable manufacturing overhead                                       3

Fixed manufacturing overhead ($273,000 ÷ 21,000 units)      13

Absorption costing unit product cost                                $34

• 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                                    21,000                 21,000

Units sold                                           16,000                  26,000

Required:

Question 1. Using variable costing, what is the unit product cost for both years?

Question 2. What is the variable costing net operating income in Year 1 and in Year 2?

Question 3. Reconcile the absorption costing and the variable costing net operating income figures for each year.