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

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

	Year 1		Year 2
Sales (@ $50 per unit)	$	1,000,000	$	1,500,000
Cost of goods sold (@ $34 per unit)		680,000		1,020,000
Gross margin		320,000		480,000
Selling and administrative expenses*		310,000		340,000
Net operating income	$	10,000	$	140,000

* $3 per unit variable; $250,000 fixed each year.

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

Direct materials	$	8
Direct labor		10
Variable manufacturing overhead		2
Fixed manufacturing overhead ($350,000 ÷ 25,000 units)		14
Absorption costing unit product cost	$	34

   

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

	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. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Variable Costing Income Statement
	Year 1	Year 2
Sales	$	$
Variable expenses:
Variable cost of goods sold
Variable selling and administrative expenses
Total variable expenses
Contribution margin
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative expenses
Total fixed expenses
Net operating income (loss)	$	$

2.	Reconcile the absorption costing and variable costing net operating income figures for each year. (Loss amounts and amounts to be deducted should be indicated with a minus sign. Omit the "$" sign in your response.)

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)	$	$

Explanation:

1. 

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

Direct materials	$	8
Direct labor		10
Variable manufacturing overhead		2
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.

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