Question

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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		300,000			350,000
Net income	$	60,000		$	310,000

Additional Information

Sales and production data for these first two years follow.

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

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	$	6
Direct labor		9
Variable overhead		6
Fixed overhead ($340,000/34,000 units)		10
Total product cost per unit	$	31

Selling and administrative expenses consist of the following.

		2016			2017
Variable selling and administrative expenses ($2.5 per unit)	$	60,000		$	110,000
Fixed selling and administrative expenses		240,000			240,000
Total selling and administrative expenses	$	300,000		$	350,000

Complete income statements for the company for each of its first two years under variable costing. (Loss amounts should be entered with a minus sign.)

	DOWELL Company Variable Costing Income Statements 2016 2017 Net income (loss)

Answer 1

DOWELL Company

Variable Costing Income Statement

Particulars	2016	2017
Sales (A)	$ 1,104,000	$ 2,024,000
Less: Variable Costs -
Direct Material	144,000	264,000
Direct Labor	216,000	396,000
Variable Overhead	144,000	264,000
Variable selling & administrative expenses	60,000	110,000
Total Variable Costs (B)	-564,000	-1,034,000
Contribution Margin (C)= (A)-(B)	$ 540,000	$ 990,000
Less : Fixed Expenses -
Fixed Overhead (34,000*10)	340,000	340,000
Fixed selling & administrative expenses	240,000	240,000
Total Fixed Costs (D)	-580,000	-580,000
Net Income ( Loss ) (C) - (D)	$ (-40,000)	$ 410,000

Working Notes :

1. Cost of Direct materials -

	2016	2017
Units Sold	24,000	44,000
Cost per unit	6	6
Cost of direct materials	$ 144,000	$ 264,000

2. Cost of Direct Labor -

	2016	2017
Units sold	24,000	44,000
Cost per unit	9	9
Cost of Direct Labor	$ 216,000	$ 396,000

3. Calculation of Variable Overhead -

	2016	2017
Units sold	24,000	44,000
Cost per unit	6	6
Variable Overhead	$ 144,000	$ 264,000

[For verifying, reconcile variable costing income to absorption costing income as follows : ]

Particulars	2016	2017
Variable costing income (calculated)	$ (-40,000)	$ 410,000
Add : Fixed overhead in ending inventory (10,000*10) ( note)	100,000
Less : Fixed overhead in beginning inventory (10,000*10) (note)		(-100,000)
Absorption costing income ( given )	$ 60,000	$ 310,000

Note :

1). For 2016 , it is assumed that Opening inventory = 0

Therefore, Opening inventory = 0 , Units produced = 34,000 , units sold = 24000 and hence closing (ending) inventory =10,000 units.
Fixed overhead deferred in inventories for 2016 = change in inventory (ending - opening ) * fixed overhead rate =
( 10,000 - 0)*10 = $ 100,000

2). For 2017, opening inventory(10,000) + units produced ( 34000 ) - units sold (44,000) gives closing ( ending ) inventory = 0

Therefore fixed overhead in deferred inventories = change in inventory ( ending - opening ) * fixed overhead rate = (0 - 10,000)* 10 = $ (-100,000)