Question

# Problem 6-19A Variable Costing Income Statement; Reconciliation [LO6-2, LO6-3] During Heaton Company’s first two years of...

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.)

 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

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