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

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

 

	Year 1		Year 2
Sales (@ $63 per unit)	$	1,260,000	$	1,890,000
Cost of goods sold (@ $34 per unit)		680,000		1,020,000
Gross margin		580,000		870,000
Selling and administrative expenses*		312,000		342,000
Net operating income	$	268,000	$	528,000

  

* $3 per unit variable; $252,000 fixed each year.

 

The company’s $34 unit product cost is computed as follows:

 

Direct materials	$	5
Direct labor		11
Variable manufacturing overhead		4
Fixed manufacturing overhead ($350,000 ÷ 25,000 units)		14
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	25,000	25,000
Units sold	20,000	30,000

 

Required:

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

Explanation:

1.

The unit product cost under variable costing is computed as follows:

 

Direct materials	$	5
Direct labor		11
Variable manufacturing overhead		4
Variable costing unit product cost	$	20

  

	Year 1		Year 2
Variable cost of goods sold (@ $20 per unit)	$	400,000	$	600,000
Variable selling and administrative expenses (@ $3 per unit)	$	60,000	$	90,000

 
2.

	Year 1	Year 2
Units in beginning inventory	0	5,000
+ Units produced	25,000	25,000
− Units sold	20,000	30,000
= Units in ending inventory	5,000	0

Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing (5,000 units × $14 per unit in Year 1; 5,000 units × $14 per unit in Year 2) = $70,000