Question

Variable Costing Income Statement;

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

  

	Year 1		Year 2
Sales (@ $64 per unit)	$	1,088,000	$	1,728,000
Cost of goods sold (@ $37 per unit)		629,000		999,000
Gross margin		459,000		729,000
Selling and administrative expenses*		301,000		331,000
Net operating income	$	\158,000\	$	398,000

   

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

  

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

  

Direct materials	$	6
Direct labor		12
Variable manufacturing overhead		5
Fixed manufacturing overhead ($308,000 ÷ 22,000 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	22,000	22,000
Units sold	17,000	27,000

  

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.)

     

Answer 1