Question

In: Accounting

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

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 (@ $37 per unit) 592,000     962,000    
  Gross margin 416,000     676,000    
  Selling and administrative expenses* 297,000     327,000    
  Net operating income $ 119,000     $ 349,000    

   

* $3 per unit variable; $249,000 fixed each year.

  

The company’s $37 unit product cost is computed as follows:

  

  Direct materials $ 9   
  Direct labor 9   
  Variable manufacturing overhead 3   
  Fixed manufacturing overhead ($336,000 ÷ 21,000 units) 16   
  Absorption costing unit product cost $ 37   

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.

     

2.

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

     

Solutions

Expert Solution

1.

Heaton Company
Income Statement (Variable costing)
Year 1 Year 2
Sales $                       1,008,000 $                       1,638,000
Variable Expenses
Direct Material 16,000*$9 = $144,000 26,000*$9 = $234,000
Direct Labour 16,000*$9 = $144,000 26,000*$9 = $234,000
Variable Manufacturing overhead 16,000*$3 = $48,000 26,000*$3 = $78,000
Variable selling administrative expenses 16,000*$3 = $48,000 26,000*$3 = $78,000
Total Variable expenses $                           384,000 $                           624,000
Contribution margin $                           624,000 $                       1,014,000
Fixed Expenses
Fixed Manufacturing overhead $                           336,000 $                           336,000
Fixed selling and administrative expenses $                           249,000 $                           249,000
Total Fixed Expenses $                           585,000 $                           585,000
net operating income (Loss) $                             39,000 $                           429,000

2.

Reconciliation
Net Income (Variable costing) $                           39,000 $                        429,000
Add: Fixed Manufacturing overhead carried forward (closing inventories) 5,000*$16 = $80,000
Less: Fixed Manufacturing overhead brought in (opening inventories) 5,000*$16 = $80,000
Net Income (Absorption Costing) $                        119,000 $                        349,000

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