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

a)variable costing contribution format income statement

Net operating income under variable costing

Partiulars Year 1(in$) Year 2(in$) Sales 945000 1575000 Less Variable ost Of Goods Sold: Opening Inventory 0 110000 add:V.cost of goods Manufatured 440000 440000 available for sale 440000 550000 Less:closing Inventory 110000 330000 0 550000 Gross Contribution Margin 615000 1025000 Less: Variable Selling &admin Exp 45000 75000    Contribution Margin 570000 950000 Less Fixed Expenses Salries & Wages 136000 136000 Dep.on Eqp &Buliding 204000 204000 Selling & Admin Exp 228000 568000 228000 568000 Net Operating Inome 2000 382000 (2) Reconciliation of net operating income: Particulars Year 1 Year 2

Net operating income under variable costing

2,000 382000 Fixed manufacturing overhead deferred in inventory 85,000 -85000 ——– Net operating income under absorption costing 87,000 297000 ——–

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