1. During Heaton Company’s first two years of operations, the company reported absorption
costing net operating income as follows:
Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder
consists
of depreciation charges on production equipment and buildings.
Prepare a variable costing contribution format income statement for each year.
Reconcile the absorption costing and the variable costing net operating income figures for each
year. (Losses should be indicated by a minus sign.)
During Heaton Company’s first two years of operations, the company reported absorption
costing net operating income as follows:
Solution
1)
variable cost of manufacturing = 7+9+2 = 18
2)
Year 1 year2
sales 976.000 1,586,000
less:Variable cost of goods sold
Beginning inventory - (90,000) [5000*18]
Variable cost of goods manufactured (378,000) (378000)
closing Inventory 90,000 -
Gross contribution margin 688,000 1,118,000
less:variable selling expenses (48,000) (78000)Â Â Â Â Â [26000*3]
Less:Period cost
Fixed manufacturing cost (294,000) (294,000)

2. Fixed selling cost (255,000) (255,000)
net income 91,000 491,000