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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 | |||||||||
