Question

During Durton Company’s first two years of operations, the company reported absorption costing operating income as shown below. Production and cost data for the two years are given:

	Year 1	Year 2
Units produced	25,000	25,000
Units sold	20,000	30,000

	Year 1			Year 2
Sales (at $50 per unit)	$	1,000,000		$	1,500,000
Cost of goods sold:
Beginning inventory		0			170,000
Add cost of goods manufactured (at $34 per unit)		850,000			850,000
Goods available for sale		850,000			1,020,000
Less ending inventory (at $34 per unit)		170,000			0
Cost of goods sold		680,000			1,020,000
Gross margin		320,000			480,000
Selling and administrative expenses*		310,000			340,000
Operating income	$	10,000		$	140,000

*$3 per unit variable; $250,000 fixed each year.

The company’s $34 unit product cost is computed as follows:

Direct materials	$	8
Direct labour		10
Variable manufacturing overhead		2
Fixed manufacturing overhead ($350,000 ÷ 25,000 units)		14
Unit product cost	$	34

Required:

1. Prepare a variable costing income statement for each year in the contribution format.

2. Reconcile the absorption costing and variable costing operating income figures for each year. (Loss amounts should be indicated by a minus sign.)

Answer 1