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)	$	1,147,000	$	1,767,000
Cost of goods sold (@ $40 per unit)		740,000		1,140,000
Gross margin		407,000		627,000
Selling and administrative expenses*		329,300		359,300
Net operating income	$	77,700	$	267,700

   

* $3 per unit variable; $273,800 fixed each year.

  

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

  

Direct materials	$	7
Direct labor		12
Variable manufacturing overhead		3
Fixed manufacturing overhead ($423,000 ÷ 23,500 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	23,500	23,500
Units sold	18,500	28,500

  

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.)

     

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) $ 1,147,000 $ 1,767,000 Cost of goods sold (@ $40 per unit) 740,000 1,140,000 Gross margin 407,000 627,000 Selling and administrative expenses* 329,300 359,300 Net operating income $ 77,700 $ 267,700 * $3 per unit variable; $273,800 fixed each year. The company’s $40 unit product cost is computed as follows: Direct materials $ 7 Direct labor 12 Variable manufacturing overhead 3 Fixed manufacturing overhead ($423,000 ÷ 23,500 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 23,500 23,500 Units sold 18,500 28,500 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

1
	Year 1	Year 2
Sales	1147000	1767000
Variable expenses:
Variable cost of goods sold	407000	627000
Variable selling and administrative expenses	55500	85500
Total Variable expenses	462500	712500
Contribution margin	684500	1054500
Fixed expenses:
Fixed manufacturing overhead	423000	423000
Fixed selling and administrative expenses	273800	273800
Total Fixed expenses	696800	696800
Net operating income(loss)	(12300)	357700
2
	Year 1	Year 2
Variable costing net income	(12300)	357700
Add(deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	90000	(90000)
Absorption costing net operating income	77700	267700