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During Heaton Companys first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $60
During Heaton Companys first two years of operations, the company reported absorption costing net operating income as follows: |
Year 1 | Year 2 | |||
Sales (@ $60 per unit) | $ | 1,080,000 | $ | 1,680,000 |
Cost of goods sold (@ $30 per unit) | 540,000 | 840,000 | ||
Gross margin | 540,000 | 840,000 | ||
Selling and administrative expenses* | 334,800 | 364,800 | ||
Net operating income | $ | 205,200 | $ | 475,200 |
* $3 per unit variable; $280,800 fixed each year. |
The companys $30 unit product cost is computed as follows: |
Direct materials | $ | 6 |
Direct labor | 8 | |
Variable manufacturing overhead | 4 | |
Fixed manufacturing overhead ($276,000 23,000 units) | 12 | |
Absorption costing unit product cost | $ | 30 |
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 | 23,000 | 23,000 |
Units sold | 18,000 | 28,000 |
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.) |
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