PROBLEM 5A–8 Variable Costing Income Statement; Reconciliation [ LO6 , LO7 ]

During Heaton Company’s first two years of operations, the company reported absorption costing net operating income as follows:

Year 1 Year 2 Sales (@ $25 per unit).................................................... $1,000,000 $1,250,000 Cost of goods sold (@ $18 per unit) ............................... 720,000 900,000 Gross margin .................................................................. 280,000 350,000 Selling and administrative expenses* ............................. 210,000 230,000 Net operating income ..................................................... $ 70,000 $ 120,000

*$2 per unit variable; $130,000 fixed each year.

The company’s $18 unit product cost is computed as follows:

Direct materials ......................................................................... $ 4 Direct labor ............................................................................... 7 Variable manufacturing overhead ............................................. 1 Fixed manufacturing overhead ($270,000 45,000 units) ...... 6 Absorption costing unit product cost ......................................... $18 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 ...................... 45,000 45,000 Units sold ............................... 40,000 50,000 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.