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 (@ $60 per unit)	$	1,080,000	$	1,680,000
Cost of goods sold (@ $30 per unit)		540,000		840,000
Gross margin		540,000		840,000
Selling and administrative expenses*		334,800		364,800
Net operating income	$	205,200	$	475,200

   

* $3 per unit variable; $280,800 fixed each year.

  

The company’s $30 unit product cost is computed as follows:

  

Direct materials	$	6
Direct labor		8
Variable manufacturing overhead		4
Fixed manufacturing overhead ($276,000 ÷ 23,000 units)		12
Absorption costing unit product cost	$	30

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	23,000	23,000
Units sold	18,000	28,000

  

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 and deductions should be indicated with a minus sign.)

     

Answer 1