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

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

	Year 1		Year 2
Sales (@ $63 per unit)	$	1,134,000		$	1,764,000
Cost of goods sold (@ $34 per unit)		612,000			952,000
Gross margin		522,000			812,000
Selling and administrative expenses*		304,000			334,000
Net operating income	$	218,000		$	478,000

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

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

Direct materials	$	8
Direct labor		9
Variable manufacturing overhead		5
Fixed manufacturing overhead ($276,000 23,000 units)		12
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	23,000	23,000
Units sold	18,000	28,000

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.

I know that the