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 (@ $61 per unit)	$	1,067,500	$	1,677,500
Cost of goods sold (@ $37 per unit)		647,500		1,017,500
Gross margin		420,000		660,000
Selling and administrative expenses*		297,500		327,500
Net operating income	$	122,500	$	332,500

   

* $3 per unit variable; $245,000 fixed each year.

  

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

  

Direct materials	$	9
Direct labor		9
Variable manufacturing overhead		5
Fixed manufacturing overhead ($315,000 ÷ 22,500 units)		14
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	22,500	22,500
Units sold	17,500	27,500

  

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 and deductions should be indicated with a minus sign.)

     

Answer 1

1)	unit product cost under variable costing
	Direct materials				9
	direct labor				9
	variable manufacturing overhead				5
	unit product cost under variable costing				23
	for both years $26 is the unit product cost
2)		Heaton /company
	Varible costing income statement
					year 1	year 2
	Sales				1,067,500	1,677,500
	Variable expenses:
	Variable cost of goods sold				402500	632500
	Variable selling & adm expense				52500	82500
	total variable expense				455000	715000
	Contribution margin				612,500	962,500
	fixed expenses:
	fixed manufacturing overhead				315,000	315,000
	Fixed selling and adm expense				245,000	245,000
	total fixed expense				560,000	560,000
	net operating income				52,500	402,500
3)
	Reconcilation
						year 1	year 2
	Variable costing net income					52,500	402,500
	Add Fixed oh deferred(released) in ending inventory					70,000	-70,000
	Absorption costing net income					122,500	332,500
	fixed overhead deferred (released)= ending inventory *FOH per unit
				5000*14	70,000