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)

Variable Costing Income Statement Year 1 Year 2 Sales                             1,080,000                        1,680,000 Variable expenses: Cost of goods sold                                306,000                            476,000 Variable selling and admin expenses                                   54,000                              84,000 Total Variable expenses                                360,000                            560,000 Contribution Margin                                720,000                        1,120,000 Fixed expenses: Fixed manufacturing overhead                                322,000                            322,000 Fixed selling and admin expenses                                248,000                            248,000 Total Fixed expenses                                570,000                            570,000 Net Operating Income                                150,000                            550,000

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