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QVariable Costing Income Statement: Reconciliation

During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows:
Year 1 Year 2
Sales (@ $25 per unit)................................... $1,000,000 $1,250,000
Cost of goods sold (@ $18 per unit)................... 720,000 900,000
Gross Margin.............................................. 280,000 350,000
Selling and administrative expenses.................. 210,000 230,000
Net operating income.................................. 70,000 120,000
$2.00 per unit variable: $130,000 fixed each year

The company's $18 unit product cost is computed as follows:
Direct Materials...............................................................$4
Direct Labor...................................................................$7
Variable Manufacturing Overhead..........................................$1
Fixed Manufacturing Overhead.............................................$6
Absorption costing unit product cost......................................$18

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................................................. 45,000 45,000
Units Sold....................................................... 40,000 50,000

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.
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