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

Year 1 Year 2

Sales (@ $63 per unit) $ 945,000 $ 1,575,000

Cost of goods sold (@ $29 per unit) 435,000 725,000

-----------------------------------------------------------

Gross margin 510,000 850,000

Selling and administrative expenses 292,000 322,000

---------------------------------------------------

Net operating income $ 218,000 $ 528,000

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

$3 per unit variable, $247,000 fixed each year.. The companys $29 unit product cost is computed as follows:

Direct materials $ 7

Direct labor 8

Variable manufacturing overhead 2

Fixed manufacturing overhead ($240,000 20,000 units) 12

--------------------

Absorption costing unit product cost $ 29

-----------------------------------------------------------------------------------------------------------------

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 20,000 20,000

Units sold 15,000 25,000

-----------------------------------------------------------------------------------------

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

Heaton Company

Variable Costing Income Statement

Year 1 Year 2

Variable expenses:

Total variable expenses

Fixed expenses:

Total fixed expenses

Net operating income (loss)

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)

Add (deduct) fixed manufacturing overhead deferred in (released from)

inventory under absorption costing

Absorption costing net operating income (loss)