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 (@ $34 per unit)   544,000       884,000   Gross margin   432,000       702,000   Selling and administrative expenses*   295,000       325,000   Net operating income $ 137,000     $ 377,000       * $3 per unit variable; $247,000 fixed each year.  The company’s $34 unit product cost is computed as follows:      Direct materials $ 6   Direct labor   8   Variable manufacturing overhead   2   Fixed manufacturing overhead ($378,000 ÷ 21,000 units)   18   Absorption costing unit product cost $ 34       Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consistsof 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.     Heaton Company Variable Costing Income Statement   Year 1 Year 2       Variable expenses:                             Total variable expenses           Fixed 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 operating income (loss)     Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing     Absorption costing net operating income (loss)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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 (@ $34 per unit)   544,000       884,000  
Gross margin   432,000       702,000  
Selling and administrative expenses*   295,000       325,000  
Net operating income $ 137,000     $ 377,000  
 

 

* $3 per unit variable; $247,000 fixed each year. 

The company’s $34 unit product cost is computed as follows: 

 

 
Direct materials $ 6  
Direct labor   8  
Variable manufacturing overhead   2  
Fixed manufacturing overhead ($378,000 ÷ 21,000 units)   18  
Absorption costing unit product cost $ 34  
 

 

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.

 
 
Heaton Company
Variable Costing Income Statement
  Year 1 Year 2
     
Variable expenses:    
     
     
     
     
Total variable expenses    
     
Fixed 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 operating income (loss)    
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing    
Absorption costing net operating income (loss)    

 

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