The companys $34 unit product cost is computed as follows:

Direct materials	$	9
Direct labor		10
Variable manufacturing overhead		2
Fixed manufacturing overhead ($312,000 24,000 units)		13
Absorption costing unit product cost	$	34

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	24,000	24,000
Units sold	19,000	29,000

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)	$	1,159,000	$	1,769,000
Cost of goods sold (@ $34 per unit)		646,000		986,000
Gross margin		513,000		783,000
Selling and administrative expenses*		308,000		338,000
Net operating income	$	205,000	$	445,000

* $3 per unit variable; $251,000 fixed each year.

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
Fixed expenses:
Total fixed expenses		0
Net operating income (loss)		$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 (loss)