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.)

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

Explanation / Answer

Heaton Company Unit information Year 1 Year 2 Op balance                      -             5,000.00 Production       23,000.00         23,000.00 Sales       18,000.00         28,000.00 Closing stock         5,000.00                        -   Heaton Company Contribution Format Income statement Year 1. Year 1. Details Amt /Unit $ Total Amt $ Amt /Unit $ Total Amt $ Sales revenue               62.00 1,116,000.00               62.00 1,736,000.00 Less Variable cost of Goods sold Opening Stock                      -           90,000.00 Direct Materials                  8.00       184,000.00                  8.00       184,000.00 Direct Labor                  9.00       207,000.00                  9.00       207,000.00 Variable manufacturing OH                  1.00         23,000.00                  1.00         23,000.00 Total Variable cost of production               18.00       414,000.00               18.00       504,000.00 Less Closing stock at variable cost               18.00       (90,000.00)               18.00                         -   Total Cost of goods sold               18.00       324,000.00               18.00       504,000.00 Variable cost of selling & Admin                  3.00         54,000.00                  3.00         84,000.00 Total variable cost of sales               21.00       378,000.00               21.00       588,000.00 Contribution Margin               41.00       738,000.00               41.00 1,148,000.00 Less Fixed cost Fixed Manufacturing OH       276,000.00       276,000.00 Fixed selling & Admin OH       246,000.00       246,000.00 Total Fixed costs       522,000.00       522,000.00 Net Operating Income       216,000.00       626,000.00 Net Operating Income Reco;     Net Operating Income by Absorption costing       276,000.00       566,000.00 Difference in Net Op Income         60,000.00       (60,000.00) Closing Stock /opening stock variation @12 for 5000 units         60,000.00       (60,000.00)

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