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

	Year 1		Year 2
Sales (@ $62 per unit)	$	1,054,000	$	1,674,000
Cost of goods sold (@ $35 per unit)		595,000		945,000
Gross margin		459,000		729,000
Selling and administrative expenses*		297,000		327,000
Net operating income	$	162,000	$	402,000

* $3 per unit variable; $246,000 fixed each year.

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

Direct materials	$	5
Direct labor		12
Variable manufacturing overhead		2
Fixed manufacturing overhead ($352,000 22,000 units)		16
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

22,000

22,000

Units sold

17,000

27,000

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	0	0
	0	0
Fixed expenses:
Total fixed expenses	0	0
	$0	$0

2.

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	$0	$0