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:

Year 1 Year 2

Sales (@ $64 per unit) $ 1,088,000 $ 1,728,000

Cost of goods sold (@ $36 per unit) 612,000 972,000

Gross margin 476,000 756,000

Selling and administrative expenses* 301,000 331,000

Net operating income $ 175,000 $ 425,000

* $3 per unit variable; $250,000 fixed each year. The company’s $36 unit product cost is computed as follows: Direct materials $ 6 Direct labor 11 Variable manufacturing overhead 3 Fixed manufacturing overhead ($352,000 ÷ 22,000 units) 16 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 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: a. Prepare a variable costing contribution format income statement for each year. b. Reconcile the absorption costing and the variable costing net operating income figures for each year. (Losses should be indicated by a minus sign.)

Explanation / Answer

Reconcile the absorption costing and the variable costing net operating income figures for each year

Variable costing manfactuing overhead 352000

16*17000units =272000

352000-272000 =80000

Year 1 (17000) Year 2 (27000) Sales 10,88,000 17,28,000 Variable expenses: Variable Cost of Goods sold (6+11+3)*17000 340000 540000 Selling and administrative expenses 51000 81000 Contribution 6,97,000 11,07,000 Fixed expenses: Fixed manufacturing Overhead 352000 352000 Fixed selling and administrative expense 250000 250000 Net operating income 95,000 5,05,000

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