During Denton Company’s first two years of operations, the company reported absorption costing net operating income as follows:
Year 1 Year 2
Sales (@ $64 per unit) $ 1,216,000 $ 1,856,000
Cost of goods sold (@ $32 per unit) 608,000 928,000
Gross margin 608,000 928,000
Selling and administrative expenses* 311,000 341,000
Net operating income $ 297,000 $ 587,000
* $3 per unit variable; $254,000 fixed each year.
The company’s $32 unit product cost is computed as follows:
Direct materials $ 8
Direct labor 8
Variable manufacturing overhead 4
Fixed manufacturing overhead ($288,000 ÷ 24,000 units) 12
Absorption costing unit product cost $ 32
Production and cost data for the two years are given below:
Year 1 Year 2
Units produced 24,000 24,000
Units sold 19,000 29,000
Required:
1.
Prepare a variable costing contribution format income statement for each year. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)
Variable Costing Income Statement
Year 1 Year 2
$ $
Variable expenses:
Total variable expenses
Fixed expenses:
Total fixed expenses
$ $
2.
Reconcile the absorption costing and variable costing net operating income figures for each year. (Loss amounts and amounts to be deducted should be indicated with a minus sign. Omit the "$" sign in your response.)
Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Year 1 Year 2
Variable costing net operating income (loss) $ $
Add (deduct) fixed manufacturing overhead
deferred in (released from) inventory under
absorption costing
Absorption costing net operating income (loss) $ $
$ $
1. Variable Costing Income Statement:
Year 1:
Sales ($64 per unit): $1,216,000
Variable expenses:
Cost of goods sold ($32 per unit x 19,000 units): $608,000
Selling and administrative expenses: $3 per unit x 19,000 units + $254,000 = $311,000
Total variable expenses: $608,000 + $311,000 = $919,000
Fixed expenses:
Selling and administrative expenses: $254,000
Total fixed expenses: $254,000
Net operating income: Sales - Total variable expenses - Total fixed expenses
Net operating income = $1,216,000 - $919,000 - $254,000 = $297,000
Year 2:
Sales ($64 per unit): $1,856,000
Variable expenses:
Cost of goods sold ($32 per unit x 29,000 units): $928,000
Selling and administrative expenses: $3 per unit x 29,000 units + $254,000 = $341,000
Total variable expenses: $928,000 + $341,000 = $1,269,000
Fixed expenses:
Selling and administrative expenses: $254,000
Total fixed expenses: $254,000
Net operating income: Sales - Total variable expenses - Total fixed expenses
Net operating income = $1,856,000 - $1,269,000 - $254,000 = $587,000
2. Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes:
Year 1:
Variable costing net operating income (loss): $297,000
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing: $0
Absorption costing net operating income (loss): $297,000
Year 2:
Variable costing net operating income (loss): $587,000
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing: $0
Absorption costing net operating income (loss): $587,000
To prepare the variable costing contribution format income statement for each year, we need to calculate the variable expenses and the fixed expenses.
For Year 1:
Variable expenses:
- Direct materials: $8 per unit * 19,000 units sold = $152,000
- Direct labor: $8 per unit * 19,000 units sold = $152,000
- Variable manufacturing overhead: $4 per unit * 19,000 units sold = $76,000
- Variable selling and administrative expenses: $3 per unit * 19,000 units sold = $57,000
Total variable expenses = $152,000 + $152,000 + $76,000 + $57,000 = $437,000
Fixed expenses:
- Fixed manufacturing overhead: $12 per unit * 24,000 units produced = $288,000
- Fixed selling and administrative expenses: $254,000
Total fixed expenses = $288,000 + $254,000 = $542,000
Variable Costing Income Statement for Year 1:
Year 1
$ $
Variable expenses:
Direct materials 152,000
Direct labor 152,000
Variable manufacturing overhead 76,000
Variable selling and administrative expenses 57,000
Total variable expenses
437,000
Fixed expenses:
Fixed manufacturing overhead 288,000
Fixed selling and administrative expenses 254,000
Total fixed expenses
542,000
$ $
To reconcile the absorption costing and variable costing net operating income figures for each year, we need to calculate the difference between the two methods by considering the fixed manufacturing overhead deferred in (or released from) inventory under absorption costing.
For Year 1:
Variable costing net operating income (loss) = $297,000
To calculate the fixed manufacturing overhead deferred in (or released from) inventory under absorption costing, we need to determine the difference in units produced and units sold.
Units produced: 24,000
Units sold: 19,000
Difference = 24,000 - 19,000 = 5,000 units
Fixed manufacturing overhead deferred in (or released from) inventory under absorption costing = Fixed manufacturing overhead per unit * Difference in units = $12 per unit * 5,000 units = $60,000
Absorption costing net operating income = Variable costing net operating income + Fixed manufacturing overhead deferred in (or released from) inventory = $297,000 + $60,000 = $357,000
Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes for Year 1:
Year 1
Variable costing net operating income (loss) $ 297,000
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing 60,000
Absorption costing net operating income (loss) $ 357,000
You can follow similar calculations and steps for Year 2 to prepare the variable costing income statement and reconcile the net operating income figures.