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) 1,159,000 1,769,000

Cost Of Goods Sold (@36$ per unit) 684,000 1,044,000

Gross Margin 475,000 725,000

Selling And Administrative expenses* 311,000 341,000

Net Operating Income 164,000 384,000

*3$ per unit variable, 254,000 fixed each year.

The company's 36$ unit product cost is computed as follows

Direct Materials: 7$

Direct Labor: 11$

Variable Manufacturing Overhead : 1$

Fixed Manufacturing Overhead (408,000/24,000 units)=17$

Absorption Costing unit product cost: 36$

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production cost and cost data for the two years are:

Year 1 Year 2

Units Produced 24,000 24,000

Units Sold 19,000 29,000

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

1)	unit product cost under variable costing
	Direct materials				7
	direct labor				11
	variable manufacturing overhead				1
	unit product cost under variable costing				19
	for both years $19 is the unit product cost
2)		Heaton /company
	Varible costing income statement
					year 1	year 2
	Sales				1,159,000	1,769,000
	Variable expenses:
	Variable cost of goods sold				361000	551000
	Variable selling & adm expense				57000	87000
	total variable expense				418000	638000
	Contribution margin				741,000	1,131,000
	fixed expenses:
	fixed manufacturing overhead				408,000	408,000
	Fixed selling and adm expense				254,000	254,000
	total fixed expense				662,000	662,000
	net operating income				79,000	469,000
3)
	Reconcilation
						year 1	year 2
	Variable costing net income					79,000	469,000
	Add Fixed oh deferred(released) in ending inventory					85,000	-85,000
	Absorption costing net income					164,000	384,000
	fixed overhead deferred (released)= ending inventory *FOH per unit
				5000*17=	85,000
3)
	Reconcilation
						year 1	year 2
	Variable costing net income					79,000	469,000
	Add Fixed oh deferred in ending inventory					85,000
	less:fixed on released in ending invnetory						-85,000
	Absorption costing net income					164,000	384,000