During Heaton Company’s first two years of operations, the company reported abso
ID: 2490123 • Letter: D
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 and deductions should be indicated with a minus sign.)
Year 1 Year 2 Sales (@ $62 per unit) $ 1,116,000 $ 1,736,000 Cost of goods sold (@ $39 per unit) 702,000 1,092,000 Gross margin 414,000 644,000 Selling and administrative expenses* 313,200 343,200 Net operating income $ 100,800 $ 300,800 Required 1. Prepare a variable costing contribution format income statement for each year. Heaton Company Variable Costing Income Statement Year 1 Year 2 Sales $ 1,116,000 $1,736,000 Variable expenses Variable cost of goods sold Variable selling and administrative expenses Total variable expenses Contribution margin Fixed expenses 16,000 1,736,000 Fixed manufacturing overhead Fixed selling and administrative expenses Total fixed expenses Net operating income (loss) $ 1,116,000 $1,736,000 2. Reconcile the absorption costing and the variable costing net operating income figures for each year (Losses and deductions should be indicated with a minus sign.)Explanation / Answer
1.
Income statement under variable costing
Year 1
Year 2
Unit sales
18,000
28,000
Sales
$ 1,116,000
$ 1,736,000
Variable expenses:
Variable cost of goods sold @ $23 per unit
$ 414,000
$ 644,000
Variable selling and administrative expenses @ $3 per unit
$ 54,000
$ 84,000
Contribution margin
$ 648,000
$ 1,008,000
Fixed expenses:
Fixed manufacturing overhead
$ 368,000
$ 368,000
Fixed selling and administrative expenses
$ 259,200
$ 259,200
Net Operating income
$ 20,800
$ 380,800
The unit product cost under the variable costing is computed as follows:
Direct materials
$ 8
Direct labor
$ 10
Variable manufacturing overhead
$ 5
Variable costing unit product cost
$ 23
2.
Reconciliation of Variable costing and Absorption costing net operating incomes
Year 1
Year 2
Variable costing net operating income
$ 20,800
$ 380,800
Add/(deduct): Fixed manufacturing overhead deferred in inventory under absorption costing
Year 1: (23,000 - 18,000) * $16
$ 80,000
Year 2: (28,000 - 23,000) * $16
-$ 80,000
Absorption costing net operating income
$ 100,800
$ 300,800
Income statement under variable costing
Year 1
Year 2
Unit sales
18,000
28,000
Sales
$ 1,116,000
$ 1,736,000
Variable expenses:
Variable cost of goods sold @ $23 per unit
$ 414,000
$ 644,000
Variable selling and administrative expenses @ $3 per unit
$ 54,000
$ 84,000
Contribution margin
$ 648,000
$ 1,008,000
Fixed expenses:
Fixed manufacturing overhead
$ 368,000
$ 368,000
Fixed selling and administrative expenses
$ 259,200
$ 259,200
Net Operating income
$ 20,800
$ 380,800
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