Problem 6-19 Variable Costing Income Statement; Reconciliation [LO6-2, LO6-3]

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

	Year 1			Year 2
Sales (@ $61 per unit)	$	1,159,000		$	1,769,000
Cost of goods sold (@ $32 per unit)		608,000			928,000
Gross margin		551,000			841,000
Selling and administrative expenses*		302,000			332,000
Net operating income	$	249,000		$	509,000

* $3 per unit variable; $245,000 fixed each year.

The companys $32 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		10
Variable manufacturing overhead		1
Fixed manufacturing overhead ($336,000 24,000 units)		14
Absorption costing unit product cost	$	32

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:

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?

	Year 1	Year 2
Net Operation Income (Loss)

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

	Year 1	Year 2
Variable Net Operation Income (Loss)
Absorption costing Net operation income