During Heaton Company’s first two years of operations, it reported absorption costing net operating income as…
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Question “During Heaton Company’s first two years of operations, it reported absorption costing net operating income as…”
Answer
Answer 1
Unit Product Cost (variable pricing Method) | ||
Cost | Year 1 | Year 2 |
Direct Material | 6 | 6 |
Direct Labor | 11 | 11 |
Variable Manufacturing overhead | 3 | 3 |
Unit Product Price | 20 | 20 |
– Fixed Manufacturing overheads (Depreciation, Wages & Salaries) will be considered a Period expense. They will not be included in product variable costs under Marginal costing.
Variable portion of Selling expenses will not be included in unitproduct cost, as it is the cost of production and not the selling price.
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Answer-3:
We’ve already calculated the Unit Product Cost in Solution 1 and the net Operating Income under Solution 2. Let’s now make sure that we have enough stock to last 2 years.
Inventory Statement | ||
Year 1 | Year 2 | |
Stock Opening | 0 | 5000 |
Add: Actual Production | 21000 | 21000 |
Less: Sale | 16000 | 26000 |
Closing Stock | 5000 | 0 |
Note that Year 1 closing stock will be replaced by Year 2 opening stock
We now have all the inputs needed to answer the question 3. Below is how the income will be compared under each approach:
Reconciliation | ||
Net Operating Income | Year 1 | Year 2 |
Under Absorbtion Costing | 83000 | 293000 |
Marginal Costing | -12000 | 388000 |
Different | 95000 | -95000 |
– Please note that Absorbtion costing will show Closing stock value as having fixed manufacturing overheads for the first year. This will result in higher income from Absorbtion costing. Our question assumes that Year 1’s closing stock will be 5000 units, and that the fixed manufacturing overhead per unit for each unit is $19. Total Manufacturing overheads inclosing stock = 5000 * 19= $ 95,000. This is the gap between the incomes
– The same difference will be reversed next year since there is no closing inventory. All overheads are charged under Absorbtion costing as there is no closing stock.
Conclusion
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