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. Variable costing contribution format income statement:

2. Reconciliation:

Year 1 Year 2 Sales 1,037,000 1,647,000 Variable expenses @ $ 21 per unit 357,000 567,000 Contribution margin 680,000 1,080,000 Less fixed cost Manufacturing 418,000 418,000 Selling and administrative 246,000 246,000 Net operating income 16,000 416,000

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