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.)

Year 1 Year 2   Sales (@ $63 per unit) $ 1,008,000     $ 1,638,000       Cost of goods sold (@ $35 per unit) 560,000     910,000       Gross margin 448,000     728,000       Selling and administrative expenses* 298,000     328,000       Net operating income $ 150,000     $ 400,000    

Explanation / Answer

1.

year 1 year 2

Sale 1008000 1638000

variable cost (6+13+3+3) 400000 650000

contribution 608000 988000

fixed cost 458000 588000

net profit 150000 400000

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