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

Soltuion:

(B). Reconciliation of net operating income:

  Net operating income under variable costing 2,20,000 4,80,000

Fixed manufacturing overhead deferred in inventory 2,48,000 2,48,000

Net operating income under absorption costing = 4,68,000 = 7,28,000

Particulars Amount Year 1 Amount Year 2 Sales 10,80,000 16,80,000 Less:Variable Cost of Goods Sold Cost of goods sold (@ $31 per unit) 5,58,000 8,68,000    Gross margin 5,22,000 8,12,000 Selling and administrative expenses* 3,02,000 3,32,000 Net Operating Income 2,20,000 4,80,000

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