Problem 6-19 Variable Costing Income Statement; Reconciliation [LO6-2, LO6-3]

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)	$	976,000	$	1,586,000
Cost of goods sold (@ $31 per unit)		496,000		806,000
Gross margin		480,000		780,000
Selling and administrative expenses*		303,000		333,000
Net operating income	$	177,000	$	447,000

* $3 per unit variable; $255,000 fixed each year.

The companys $31 unit product cost is computed as follows:

Direct materials	$	6
Direct labor		9
Variable manufacturing overhead		1
Fixed manufacturing overhead ($315,000 21,000 units)		15
Absorption costing unit product cost	$	31

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. (Losses should be indicated by a minus sign.)