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 and deductions should be indicated with a minus sign.)

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

Explanation / Answer

Year 1 Year 2 Sales 1067500 $1,677,500 Variable expenses: Variable cost of goods sold 332500 522500 Variable selling and administrative expenses 52500 82500 Total Variable expenses 385000 605000 Contribution margin 682500 1072500 Fixed expenses: Fixed manufacturing overhead 382500 382500 Fixed selling and administrative expenses 273000 273000 Total Fixed expenses 655500 655500 Net operatimg income(loss) $27,000 $417,000 2 Year 1 Year 2 Variable costing net income $27,000 $417,000 Add(deduct) fixed manufacturing overhead deferred in(released) 85000 -85000 Absorption costing net operating income $112,000 $332,000

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