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

During Heaton Company’s first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $61 per unit) $ 976,000 $ 1,586,000 Cost of goods sold (@ $36 per unit) 576,000 936,000 Gross margin 400,000 650,000 Selling and administrative expenses* 301,000 331,000 Net operating income $ 99,000 $ 319,000 * $3 per unit variable; $253,000 fixed each year. The company’s $36 unit product cost is computed as follows: Direct materials $ 9 Direct labor 9 Variable manufacturing overhead 1 Fixed manufacturing overhead ($357,000 ÷ 21,000 units) 17 Absorption costing unit product cost $ 36 Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings. Production and cost data for the two years are: Year 1 Year 2 Units produced 21,000 21,000 Units sold 16,000 26,000 Required: 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.)

Expert Answer


1) Unit product costing under variable costing
Direct materials 9
direct labor 9
Variable manufacturing overhead 1
Unit product costing under variable costing 19
Variable income statement
year 1 year 2
Sales (16000*61);(26000*61) 976000 1586000
less variable expense
Variable cost of goods (16000*19);(26000*19) 304000 494000
Variable selling expense (16000*3);(26000*3) 48000 78000
Contribution margin 624000 1014000
Fixed expenses
fixed manufacturing overhead 357,000 357,000
Fixed selling expense 253,000 253,000
Net income 14,000 404,000
2) Reconciliation
year 1 year 2
net income under variable costing 14,000 404,000
Add Fixed expense deferred under absorption costing(5000*17) 85000
less fixed expense in beginning inventory under absorption costing -85,000
income under absorption costing 99,000 319,000
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