Problem 5-19 Variable Costing Income Statement; Reconciliation [LO5-2, LO5-3]

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

	Year 1				Year 2
Sales (@ $61 per unit)	$	1,037,000			$	1,647,000
Cost of goods sold (@ $41 per unit)		697,000				1,107,000
Gross margin		340,000				540,000
Selling and administrative expenses*		298,000				328,000
Net operating income	$	42,000			$	212,000

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

The companys $41 unit product cost is computed as follows:

Direct materials	$	9
Direct labor		12
Variable manufacturing overhead		2
Fixed manufacturing overhead ($396,000 22,000 units)		18
Absorption costing unit product cost	$	41

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		22,000				22,000
Units sold		17,000				27,000

Required:

1. Prepare a variable costing contribution format income statement for each year.

Heaton Company
Variable Costing Income Statement
	Year 1	Year 2
Sales	$1,037,000	$1,647,000
Variable expenses:
	0	205,000
Variable cost of goods sold	506,000	506,000
Ending merchandise inventory	(205,000)	0
Variable selling and administrative expenses	(51,000)	(81,000)
Total variable expenses	250,000	630,000
Contribution margin	787,000	1,017,000
Fixed expenses:
Fixed manufacturing overhead	396,000	396,000
Fixed selling and administrative expenses	247,000	247,000
Total fixed expenses	643,000	643,000
Net operating income (loss)	$144,000	$374,000

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)	$144,000	$374,000
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	90,000	(90,000)
Absorption costing net operating income (loss)	$234,000	$284,000