Problem 6-19 Variable Costing Income Statement, Reconciliation [LO6-2, LO6-3] Du
ID: 2569095 • Letter: P
Question
Problem 6-19 Variable Costing Income Statement, Reconciliation [LO6-2, LO6-3] During Heaton Company's first two years of operations, it reported absorption costing net operating Income as follows: Year 1 Year Sales ( $64 per unit) Cost of goods sold( $38 per unit) Gross margin Selling and administrative expenses Net operating income $ 1,216,888 $1,856,888 1,182,9e8 754,8ee 336,800 418,888 722,8e8 494,88e 386,888 $ 1188,eee $3 per unit varlable; $249,000 fixed each year. The company's $38 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($488,000 ÷ 24,eee units) Absorption costing unit product cost 12 17 $ 38 Forty percent of fixed manufacturing overhead consists of wages and salaries, the remalnder consists of depreclation charges on production equipment and buildings. Production and cost data for the first two years of operations are Units produced Units sold Year 1 Year 2 24,e8 24,e80 19,88 29,888 Required 1. Using variable costing, what is the unit product cost for both years? 2. What is the varlable costing net operating Income In Year 1 and In Year 2? 3. Reconcile the absorption costing and the varlable costing net operating Income figures for each year Complete this question by entering your answers in the tabs below Required 1Required 2Required 3 Using variable costing, what is the unit product cost for both years? nit product costExplanation / Answer
Solution:
1) Unit product cost using Variable Costing
Variable Costing System
1) Product Cost refers to the costs used to fabricate/make/produce a product.
2) Under Variable Costing System, product cost includes only following variable manufacturing costs:
- Cost of direct material used
- Direct labor cost
- Variable manufacturing overheads.
3) Under this system, fixed costs are not considered in product cost and for valuation of closing stock of finished goods. Fixed costs are treated as period cost in this system.
4) Fixed Costs are not considered in product cost and for valuation of closing stock of finished goods.
5) The value of finished goods and work in process is also comprised only of Manufacturing Variable Costs.
5) Selling and administrative expenses are not included because these are not the expenses incurred in production department. These expenses relate to selling and admin department.
Unit Cost
Direct materials
$5
Direct labor
$12
Variable Manufacturing Overhead
$4
Unit Product Cost
$21
Unit Product Cost using Variable Costing = $21 per unit
2) Net Operating Income Year 1 and Year 2
Variable Costing Income Statement
Year 1
Year 2
Sales Revenue (A) (given)
$1,216,000
$1,856,000
Less: Variable Cost of Goods Sold
Production Cost (Unit Product Cost $21 x Produced Units)
$504,000
(24,000 Units x $21)
$504,000
(24,000 Units x $21)
Add: Beginning Inventory
$105,000
Cost of Goods Available for Sale
$504,000
$609,000
Less: Ending Inventory (5,000 Units x $21)
($105,000)
0
Cost of Goods Sold
$399,000
$609,000
Variable Selling and administrative Expenses (Unit Sold x $3)
$57,000
(19,000 Units x $3)
$87,000
(29,000 Units x $3)
Total Variable Cost (B)
$456,000
$696,000
Contribution Margin (C=A-B)
$760,000
$1,160,000
Fixed Expenses:
Fixed Manufacturing Overhead Costs
$408,000
$408,000
Fixed Selling and administrative expenses
$249,000
$249,000
Total Fixed Expenses (D)
$657,000
$657,000
Net Operating Income (C-D)
$103,000
$503,000
Note 1 –
Units Sold in year 1 = 19,000 Units
Units Produced Year 1 = 24,000 Units
Ending Inventory = 24,000 – 19,000 = 5,000 Units
Ending Inventory of Year 1 will become the beginning inventory of year 2
3) Reconciliation statement between the Net Operating Income as per absorption costing and variable costing
Year 1
Year 2
Net Operating Income as per Variable Costing
$103,000
$503,000
Add or (Deduct) the Fixed Manufacturing Overhead cost deferred or released from the Inventory (Since variable cost does not include fixed manufacturing cost in product cost but the absorption costing includes)
Ending Inventory Year 1 and Beginning Inventory of Year 2
(5,000 Units x $17 Fixed Overhead Per Unit)
$85,000
-$85,000
Net Operating Income as per Absorption Costing
$188,000
$418,000
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Unit Cost
Direct materials
$5
Direct labor
$12
Variable Manufacturing Overhead
$4
Unit Product Cost
$21