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.

Year 1 Year 2   Sales (@ $62 per unit) $ 961,000     $ 1,581,000       Cost of goods sold (@ $29 per unit) 449,500     739,500       Gross margin 511,500     841,500       Selling and administrative expenses* 313,100     343,100       Net operating income $ 198,400     $ 498,400    

Explanation / Answer

Year 1 Year 2 Sales 961000 $1,581,000 Variable expenses: Variable cost of goods sold 248000 408000 Variable selling and administrative expenses 46500 76500 Total Variable expenses 294500 484500 Contribution margin 666500 1096500 Fixed expenses: Fixed manufacturing overhead 266500 266500 Fixed selling and administrative expenses 266600 266600 Total Fixed expenses 533100 533100 Net operatimg income(loss) $133,400 $563,400 2 Year 1 Year 2 Variable costing net income $133,400 $563,400 Add(deduct) fixed manufacturing overhead deferred in(released) 65000 -65000 Absorption costing net operating income $198,400 $498,400

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