Reference no: EM131778523

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:

	Year 1	Year 2
Units produced	25,000	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.