Posted: July 26th, 2016

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

During Denton 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) $ 1,197,000 $ 1,827,000
Cost of goods sold (@ $39 per unit) 741,000 1,131,000

Gross margin 456,000 696,000
Selling and administrative expenses* 308,000 338,000

Net operating income $ 148,000 $ 358,000

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

The company’s $39 unit product cost is computed as follows:
Direct materials $ 7
Direct labor 11
Variable manufacturing overhead 2
Fixed manufacturing overhead ($456,000 ÷ 24,000 units) 19

Absorption costing unit product cost $ 39

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