Problem 5-19 Variable Costing Income Statement; Reconciliation [LO5-2, LO5-3] During Heaton Company’s first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $63 per unit) $ 1,008,000 $ 1,638,000 Cost of goods sold (@ $32 per unit) 512,000 832,000 Gross margin 496,000 806,000 Selling and administrative expenses* 301,000 331,000 Net operating income $ 195,000 $ 475,000 * $3 per unit variable; $253,000 fixed each year. The company’s $32 unit product cost is computed as follows: Direct materials $ 7 Direct labor 8 Variable manufacturing overhead 2 Fixed manufacturing overhead ($315,000 ÷ 21,000 units) 15 Absorption costing unit product cost $ 32 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.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Problem 5-19 Variable Costing Income Statement; Reconciliation [LO5-2, LO5-3]
During Heaton Company’s first two years of operations, the company reported absorption costing net operating income as follows:
| Year 1 | Year 2 | ||||||
| Sales (@ $63 per unit) | $ | 1,008,000 | $ | 1,638,000 | |||
| Cost of goods sold (@ $32 per unit) | 512,000 | 832,000 | |||||
| Gross margin | 496,000 | 806,000 | |||||
| Selling and administrative expenses* | 301,000 | 331,000 | |||||
| Net operating income | $ | 195,000 | $ | 475,000 | |||
* $3 per unit variable; $253,000 fixed each year.
The company’s $32 unit product cost is computed as follows:
| Direct materials | $ | 7 | |
| Direct labor | 8 | ||
| Variable manufacturing |
2 | ||
| Fixed manufacturing overhead ($315,000 ÷ 21,000 units) | 15 | ||
| Absorption costing unit product cost | $ | 32 | |
Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists
of
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.
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