Question

Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow.

		2016			2017
Sales ($46 per unit)	$	1,104,000		$	2,024,000
Cost of goods sold ($31 per unit)		744,000			1,364,000
Gross margin		360,000			660,000
Selling and administrative expenses		287,000			322,000
Net income	$	73,000		$	338,000

Additional Information

1. Sales and production data for these first two years follow.

	2016		2017
Units produced	34,000		34,000
Units sold	24,000		44,000

2. Variable cost per unit and total fixed costs are unchanged during 2016 and 2017. The company's $31 per unit product cost consists of the following.

Direct materials	$	5
Direct labor		8
Variable overhead		8
Fixed overhead ($340,000/34,000 units)		10
Total product cost per unit	$	31

3. Selling and administrative expenses consist of the following.

		2016			2017
Variable selling and administrative expenses ($1.75 per unit)	$	42,000		$	77,000
Fixed selling and administrative expenses		245,000			245,000
Total selling and administrative expenses	$	287,000		$	322,000

2. What are the differences between the absorption costing income and the variable costing income for these two years? (Loss amounts should be entered with a minus sign.) DOWELL COMPANY Reconciliation of Variable Costing Income to Absorption Costing Income 2016 2017 Variable costing income (loss) Absorption costing income (loss)

Answer 1

Ans. 2	DOWELL   COMPANY
	Reconciliation of Variable Costing Income to Absorption Costing Income
		2016	2017
	Variable costing income (loss)	($27,000)	$438,000
	Add: Ending inventory at fixed overhead per unit (10,000 * $10)	$100,000
	Less: Beginning inventory		($100,000)
	Absorption costing income (loss)	$73,000	$338,000
	*Ending inventory of Period year (2016) is the beginning for current year (2017).
	*WORKING   NOTES :    (Calculations for Net income under Variable Costing method)
	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing:
	Direct materials	$5
	Direct labor	$8
	Variable overhead	$8
	Total production cost per unit	$21
	DOWELL   COMPANY
	Variable Costing
	Income Statement
	PARTICULARS	2016		2017
	Sales		$1,104,000		$2,024,000
	Less: Variable cost of goods sold:
	Opening inventory	$0		$210,000
	Add: Cost of goods produced	$714,000		$714,000
	Variable cost of goods available for sale	$714,000		$924,000
	Less: Ending inventory	-$210,000		$0
	Variable cost of goods sold		$504,000		$924,000
	Gross Contribution Margin		$600,000		$1,100,000
	Less: Variable Selling and Administrative Expenses		$42,000		$77,000
	Contribution Margin		$558,000		$1,023,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$340,000		$340,000
	Fixed selling and administrative expenses	$245,000	$585,000	$245,000	$585,000
	Net operating income		($27,000)		$438,000
	*Cost of goods produced = Units produced * Unit product cost
	2016 (3,4000 * $21) = $714,000
	2017 (3,4000 * $21) = $714,000
	Ending inventory units (2016) = Beginning inventory + Units produced - Units sold
	2016   =    0 + 34,000 - 24,000   =   10,000
	Cost of ending inventory = Ending inventory units * Unit product cost
	2016   =   10,000 * $21   = $210,000
	*Beginning inventory
	2016 = $0
	2017 (ending inventory of 2016) = $210,000   (units 10,000 * $21)
	Ending inventory units (2017) = Beginning inventory + Units produced - Units sold
	2017   =    10,000 + 34,000 - 44,000   =   0