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		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
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

DOWELL COMPANY
Reconciliation of Variable Costing Income to Absorption Costing Income
	2016	2017
Variable costing income (loss)	-40000	410000
Add: Fixed manufacturing overheads in ending inventory [(34000 - 24000) x $10]	100000	0
Less: Fixed manufacturing overheads in beginning inventory (10000 x $10)	0	100000
Absorption costing income (loss)	60000	310000

Working:

Unit product cost - Variable costing
	Years 1 & 2
Direct materials	6
Direct labor	9
Variable manufacturing overhead	6
Variable costing unit product cost $	21

Dowell Company
Variable Costing Income Statement
	2016	2017
Sales revenue	1104000	2024000
Variable expenses:
Cost of goods sold (@ $21)	504000	924000
Selling and administrative expenses (@ $2.5)	60000	110000
Total variable expenses	564000	1034000
Contribution margin	540000	990000
Fixed expenses:
Manufacturing overheads	340000	340000
Selling and administrative expenses	240000	240000
Total fixed expenses	580000	580000
Net operating income $	-40000	410000