PROBLEM 5-19 Variable 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

1,000,0
Sales (@ $25 per unit) 00 1,250,000

COGS (@ $18 per unit) 720,000 900,000

Gross Margin 280,000 350,000

SGA Expenses 210,000 230,000

Net Operating Income 70,000 120,000

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*$2 per unit variable, $130,000 fixed yearly

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The company’s $18 unit product cost is computed as follows:

o.
Direct Materials
rs e 4
ou urc
Direct Labor 7
Variable manufacturing overhead 1
Fixed MO (270,000 / 45k units) 6
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Absorption costing unit product cost 18

aC s
vi y re

45% of fixed manufacturing overhead consists of wages & salaries; the remainder consists of
depreciation charges on production & buildings. Production and cost data for the two years are:
ed d

Year 1 Year 2
ar stu

Units produced 45,000 45,000

Unites sold 40,000 50,000

is
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1. Prepare a variable costing contribution format income statement for each year.

Variable Costing Contribution Format Income Statement

Year 1 Year 2
sh

Sales $ 1,000,000 $ 1,250,000

Variable Expenses:
Variable COGS $ 480,000 $ 600,000
Variable Selling & Admin Expense $ 80,000 $ 100,000
Total Variable Expenses $ 560,000 $ 700,000

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 Contribution Margin $ 440,000 $ 550,000
Fixed Expenses:
Fixed Manufacturing Overhead $ 270,000 $ 270,000
Fixed Selling & Administrative Expense $ 130,000 $ 130,000
Total Fixed Expenses $ 400,000 $ 400,000
Net Operating Income $ 40,000 $ 150,000

2. Reconcile the absorption costing and the variable costing net operating income figures for each
year.

Absorption Costing Unit Product Cost

Year 1 Year 2
Direct Materials $ 4.00 $ 4.00
Direct Labor $ 7.00 $ 7.00
Variable manufacturing Overhead $ 1.00 $ 1.00

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Fixed manufacturing overhead per year $ 6.00 $ 6.00

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Absorption Costing Unit Product Cost $ 18.00 $ 18.00

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Year 1 Year 2

o.
Units in beginning Inventory - 5,000
Units produced during the yearrs e 45,000 45,000
ou urc
Units sold during the year 40,000 50,000
Units in ending inventory 5,000 -
Absorption Costing Income Statement
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Year 1 Year 2
aC s

Sales $ 1,000,000.00 $ 1,250,000.00

vi y re

COGS $ 720,000.00 $ 900,000.00

Gross Margin $ 280,000.00 $ 350,000.00
Selling & admin expenses $ 210,000.00 $ 230,000.00
ed d

Net operating income $ 70,000.00 $ 120,000.00

ar stu

Year 1 Year 2
Fixed manufacturing overhead in ending inventories $ 30,000.00 $ -
Fixed manufacturing overhead in beginning
is

inventories $ - $ 30,000.00
Fixed manufacturing overhead defered in inventory $ 30,000.00 $ (30,000.00)
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Year 1 Year 2
Variable costing net operating income $ 40,000.00 $ 150,000.00
Add fixed manufacturing overhead costs deferred $ 30,000.00 $ -
sh

Deduct fixed manufacturing overhead costs

released $ - $ 30,000.00
Absorption costing net operating income (loss) $ 70,000.00 $ 120,000.00

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