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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) | $ | 976,000 | | $ | 1,586,000 |
| Cost of goods sold (@ $32 per unit) | | 512,000 | | | 832,000 |
| Gross margin | | 464,000 | | | 754,000 |
| Selling and administrative expenses* | | 301,000 | | | 331,000 |
| Net operating income | $ | 163,000 | | $ | 423,000 |
| |
* $3 per unit variable; $253,000 fixed each year.
The companys $32 unit product cost is computed as follows:
| | | |
| Direct materials | $ | 6 |
| Direct labor | | 9 |
| Variable manufacturing overhead | | 2 |
| Fixed manufacturing overhead ($315,000 21,000 units) | | 15 |
| Absorption costing unit product cost | $ | 32 |
| |
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:
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.
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