Question
During Heaton Companys first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $25
During Heaton Companys 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 companys $18 unit product cost is computed as follows:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Fixed manufacturing overhead ($270,000 4 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.
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