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During Heaton Companys 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 (@ $62 per unit) $ 1,116,000     $ 1,736,000    
  Cost of goods sold (@ $30 per unit)   540,000       840,000    
         
  Gross margin   576,000       896,000    
  Selling and administrative expenses*   305,000       335,000    
         
  Net operating income $ 271,000     $ 561,000    
         
 

   

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

  

The company’s $30 unit product cost is computed as follows:

  

     
  Direct materials $ 6   
  Direct labor   9   
  Variable manufacturing overhead   3   
  Fixed manufacturing overhead ($276,000 ÷ 23,000 units)   12   
     
  Absorption costing unit product cost $ 30   
     
 

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.)

Apr 04 2020 View more View Less

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