Powell Company produces a single product. Its income statement under absorption costing for its first two years of operation follow.
| 2010 | 2011 |
Sales ($46 per unit) | $920,000 | $1,840,000 |
Cost of goods sold ($31 per unit) | 620,000 | 1,240,000 |
Gross margin | 300,000 | 600,000 |
Selling and administrative expenses | 290,000 | 340,000 |
Net income | $ 10,000 | $ 260,000 |
Additional Information
a. Sales and production data for these first two years follow.
| 2010 | 2011 |
Units produced | 30,000 | 30,000 |
Units sold | 20,000 | 40,000 |
b. Variable cost per unit and total fixed costs are unchanged during 2010 and 2011. The company’s $31 per unit product cost consists of the following.
Direct materials | $ 5 |
Direct labor | 9 |
Variable overhead | 7 |
Fixed overhead ($300,000/30,000 units) | 10 |
Total product cost per unit | $31 |
c. Selling and administrative expenses consist of the following.
| 2010 | 2011 |
Variable selling and administrative ($2.5 per unit) | $ 50,000 | $100,000 |
Fixed selling and administrative | 240,000 | 240,00 |
Total selling and administrative | $290,000 | 0 $340,000 |
Required
1.Prepare income statements for the company for each of its first two years under variable costing.
2.Explain any difference between the absorption costing income and the variable costing income for these two years.
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