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Problem - Variable Costing Income Statement; Reconciliation
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)
$1,240,000
$1,860,000
Cost of goods sold (@ $42 per unit)
840,000
1,260,000
Gross margin
400,000
600,000
Selling and administrative expenses*
315,000
345,000
Net operating income
$85,000
$255,000
*$3 per unit variable; $255,000 fixed each year.
The company's $42 unit product cost is computed as follows:
Direct materials
$6
Direct labor
13
Variable manufacturing overhead
5
Fixed manufacturing overhead ($450,000 ÷ 25,000 units)
18
Absorption costing unit product cost
42
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:
Units produced
25,000
Units sold
20,000
30,000
Required -
1. Prepare a variable costing contribution format income statement for each year.
2. Determine the absorption costing and variable costing net operating income figures for each year.
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