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)	$	1,008,000	$	1,638,000
Cost of goods sold (@ $32 per unit)		512,000		832,000
Gross margin		496,000		806,000
Selling and administrative expenses*		323,200		353,200
Net operating income	$	172,800	$	452,800

* $3 per unit variable; $275,200 fixed each year.

The companys $32 unit product cost is computed as follows:

Direct materials	$	5
Direct labor		10
Variable manufacturing overhead		2
Fixed manufacturing overhead ($315,000 21,000 units)		15
Absorption costing unit product cost	$	32

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.

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. (Losses and deductions should be indicated with 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 (loss)