During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows:
Year 1 Year 2 Sales
(@ $61 per unit) $ 1,098,000 $ 1,708,000
Cost of goods sold (@ $35 per unit) 630,000 980,000
Gross margin 468,000 728,000
Selling and administrative expenses* 305,000 335,000
Net operating income $ 163,000 $ 393,000
*$3 per unit variable; $251,000 fixed each year.
The company’s $35 unit product cost is computed as follows:
Direct materials $ 8
Direct labor 9
Variable manufacturing overhead 4
Fixed manufacturing overhead ($322,000 ÷ 23,000 units) 14
Absorption costing unit product cost $ 35
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 23,000 23,000
Units sold 18,000 28,000
Required:
1. Prepare a variable costing contribution format income statement for each year.
2. Reconcile the absorption costing and the variable costing net operating income figures for each year. (Losses should be indicated by a minus sign.)