During Heaton Company’s first two years of operations, the company reported abso

Question

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

  

   

  

  

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

  

  

  

Prepare a variable costing contribution format income statement for each year.

     

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

     

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

Explanation / Answer

1.

2.

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

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