Variable Costing Income Statement; Reconciliation

timer Asked: Feb 21st, 2016

Question description

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

Year 1Year 2
 Sales (@ $62 per unit)$1,116,000 $1,736,000  
 Cost of goods sold (@ $37 per unit)666,000  1,036,000  
 Gross margin450,000  700,000  
 Selling and administrative expenses*301,000  331,000  
 Net operating income$149,000  $369,000  

* $3 per unit variable; $247,000 fixed each year.
The company’s $37 unit product cost is computed as follows:
 Direct materials$5  
 Direct labor10  
 Variable manufacturing overhead4  
 Fixed manufacturing overhead ($414,000 ÷ 23,000 units)18  
 Absorption costing unit product cost$37  

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 1Year 2
 Units produced23,00023,000
 Units sold18,00028,000

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

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