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

variable costing contribution format income statement Particulars Year 1 ($) Year 2 ($) 15000 Unit 25000 Unit Revenue 945000 1575000 Variable production expenses Material ($ 6 pu) 90000 150000 Labour ($12 pu) 180000 300000 Variable Man. O/H ($4) 60000 100000 Variable selling and administrative expenses 45000 75000 Contribution margin 570000 950000 Fixed production expenses 340000 340000 Fixed selling and administrative expenses 253000 253000 Net Income -23000 357000 Reconciliation of net operating income: Particulars Year 1 ($) Year 2 ($) Net operating income under absorption Costing 62000 272000 Fixed manufacturing overhead deferred in inventory (5,000 units × $17) 85000 85000 Net Income As per Variable Costing -23000 187000

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