During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: Cost of goods sold (@...

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

	Year 1		Year 2
Sales (@ $64 per unit)		1,280,000		1,920,000
Cost of goods sold (@ $40 per unit)		800,000		1,200,000
Gross margin		480,000		720,000
Selling and administrative expenses*		308,000		338,000
Net operating income		172,000		382,000

* $3 per unit variable; $248,000 fixed each year.

The company’s $40 unit product cost is computed as follows:


Direct materials
Direct labor		12
Variable manufacturing overhead
Fixed manufacturing overhead ($450,000 ÷ 25,000 units)		18
Absorption costing unit product cost		40

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		25,000		25,000
Units sold		20,000		30,000

Required:

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

Heaton Company

Variable Costing Income Statement

	Year 1	Year 2
Sales	$1,280,000	$1,920,000
Variable Expenses:
Variables of cost of goods sold
Variable selling & administrative expenses


Total Variable Expenses
Contribution Margin
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative expenses


Total Fixed Expenses
Net operating income (loss)

2. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Reconciliation of variable costing and absorption costing net operating incomes (losses)

	Year 1	Year 2
Variable costing net income (loss)
Add (deduct fixed manufacturing overhead deferred in (released from) inventory under absorption costing
Absorption costing net operating income (loss)