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		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.)

Answer 1

Income Statement (Variable Costing)

	2016	2017
Sales Revenue	$        11,04,000	$        20,24,000
Variable Cost of Goods Sold	$           5,04,000	$           9,24,000
Gross Contribution Margin	$           6,00,000	$        11,00,000
Variable Selling Expenses	$              42,000	$              77,000
Contribution Margin	$           5,58,000	$        10,23,000
Fixed Costs
Manufacturing Overhead	$           3,40,000	$           3,40,000
Selling and Administrative Expenses	$           2,45,000	$           2,45,000
Total Fixed Costs	$           5,85,000	$           5,85,000
Operating Income / (Loss)	$            -27,000	$           4,38,000

2.

Income as per variable costing	$       -27,000.00	$           4,38,000
Less : Fixed manufacturing overheads brought forward		$     1,00,000.00
Add : Fixed manufacturing overheads carried forward	$     1,00,000.00
Income as per absorption costing	$        73,000.00	$     3,38,000.00