Question

Problem 6-19A Variable Costing Income Statement; Reconciliation [LO6-2, LO6-3]

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

  

	Year 1		Year 2
Sales (@ $62 per unit)	$	992,000	$	1,612,000
Cost of goods sold (@ $37 per unit)		592,000		962,000
Gross margin		400,000		650,000
Selling and administrative expenses*		310,400		340,400
Net operating income	$	89,600	$	309,600

   

* $3 per unit variable; $262,400 fixed each year.

  

The company’s $37 unit product cost is computed as follows:

  

Direct materials	$	5
Direct labor		10
Variable manufacturing overhead		3
Fixed manufacturing overhead ($399,000 ÷ 21,000 units)		19
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 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 and deductions should be indicated with a minus sign.)

     

Answer 1

	Year 1	Year 2
Sales	992000	$1,612,000
Variable expenses:
Variable cost of goods sold	288000	468000
Variable selling and administrative expenses	48000	78000
Total Variable expenses	336000	546000
Contribution margin	656000	1066000
Fixed expenses:
Fixed manufacturing overhead	399000	399000
Fixed selling and administrative expenses	262400	262400
Total Fixed expenses	661400	661400
Net operatimg income(loss)	($5,400)	$404,600
2
	Year 1	Year 2
Variable costing net income	($5,400)	$404,600
Add(deduct) fixed manufacturing overhead deferred in(released)	95000	-95000
Absorption costing net operating income	$89,600	$309,600