Problem 4-19 (Algo) Variable Costing Income Statement; Reconciliation [LO4-2, LO4-3]

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

	Year 1			Year 2
Sales (@ $64 per unit)	$	1,216,000		$	1,856,000
Cost of goods sold (@ $43 per unit)		817,000			1,247,000
Gross margin		399,000			609,000
Selling and administrative expenses*		311,000			341,000
Net operating income	$	88,000		$	268,000

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

The companys $43 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		13
Variable manufacturing overhead		5
Fixed manufacturing overhead ($432,000 24,000 units)		18
Absorption costing unit product cost	$	43

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	24,000	24,000
Units sold	19,000	29,000

Required: All answers

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.

Answer format for #3:

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