Problem 6-20B Variable Costing Income Statement; Reconciliation [LO6-2, LO6-3]

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

	Year 1	Year 2
Sales (@ $75 per unit)	$	862,500	$	1,125,000
Cost of goods sold (@ $35.6 per unit)		409,400		534,000
Gross margin		453,100		591,000
Selling and administrative expenses*		424,500		442,000
Net operating income	$	28,600	$	149,000

* $5 per unit variable; $367,000 fixed each year.

The companys $35.6 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		13
Variable manufacturing overhead		4
Fixed manufacturing overhead ($140,450 13,250 units)		10.6
Absorption costing unit product cost	$	35.6

Production and cost data for the two years are given below:

	Year 1	Year 2
Units produced	13,250	13,250
Units sold	11,500	15,000

Required:

1.	Prepare a variable costing contribution format income statement for each year.

2.	Reconcile the absorption costing and variable costing net operating income figures for each year.(Loss and deduction amounts should be indicated with a minus sign.)