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 (@ $35 per unit)		560,000		910,000
Gross margin		416,000		676,000
Selling and administrative expenses*		302,000		332,000
Net operating income	$	114,000	$	344,000

* $3 per unit variable; $254,000 fixed each year.

The companys $35 unit product cost is computed as follows:

Direct materials

$

7

Direct labor

10

Variable manufacturing overhead

1

Fixed manufacturing overhead ($357,000 21,000 units)

17

Absorption costing unit product cost

$

35

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

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

Reconcile the absorption costing and the variable costing net operating income figures for each year. (Losses should be indicated by a minus sign.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	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