Question

During Heaton Company’s first two years of operations, the company reported absorption costing net operating income as follows:

  

	Year 1		Year 2
Sales (@ $63 per unit)	$	1,008,000	$	1,638,000
Cost of goods sold (@ $32 per unit)		512,000		832,000
Gross margin		496,000		806,000
Selling and administrative expenses*		323,200		353,200
Net operating income	$	172,800	$	452,800

   

* $3 per unit variable; $275,200 fixed each year.

  

The company’s $32 unit product cost is computed as follows:

  

Direct materials	$	5
Direct labor		10
Variable manufacturing overhead		2
Fixed manufacturing overhead ($315,000 ÷ 21,000 units)		15
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 two years are:

  

	Year 1	Year 2
Units produced	21,000	21,000
Units sold	16,000	26,000

  

Required:

1.

Prepare a variable costing contribution format income statement for each year. Heaton Company Variable Costing Income Statement Year 1 Year 2 Variable expenses: Total variable expenses Fixed expenses: Total fixed expenses Net operating income (loss) 2. Reconcile the absorption costing and the variable costing net operating income figures for each year. (Losses and deductions should be indicated with a minus sign. Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Variable costing net operating income (loss) Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing Absorption costing net operating income (loss)

Answer 1

Working notes for the above answer is as under