Problem 6-19A 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 (@ $62 per unit)	$	992,000	$	1,612,000
Cost of goods sold (@ $37 per unit)		592,000		962,000
Gross margin		400,000		650,000
Selling and administrative expenses*		310,400		340,400
Net operating income	$	89,600	$	309,600

* $3 per unit variable; $262,400 fixed each year.

The companys $37 unit product cost is computed as follows:

Direct materials	$	5
Direct labor		10
Variable manufacturing overhead		3
Fixed manufacturing overhead ($399,000 21,000 units)		19
Absorption costing unit product cost	$	37

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 and deductions should be indicated with a minus sign.)