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.

1.Prepare a variable costing contribution format income statement for each year.

2.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

Year 1 Year 2 Sales 1020000 $1,620,000 Variable expenses: Variable cost of goods sold 340000 540000 Variable selling and administrative expenses 51000 81000 Total Variable expenses 391000 621000 Contribution margin 629000 999000 Fixed expenses: Fixed manufacturing overhead 330000 330000 Fixed selling and administrative expenses 247000 247000 Total Fixed expenses 577000 577000 Net operatimg income(loss) $52,000 $422,000 2 Year 1 Year 2 Variable costing net income $52,000 $422,000 Add(deduct) fixed manufacturing overhead deferred in(released) 75000 -75000 Absorption costing net operating income $127,000 $347,000

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