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.
2.
| 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 |