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) $ 1,150,000 $ 2,070,000 Cost of goods sold ($31 per unit) 775,000 1,395,000 Gross margin 375,000 675,000 Selling and administrative expenses 288,750 323,750 Net income $ 86,250 $ 351,250 Additional Information Sales and production data for these first two years follow. 2016 2017 Units produced 35,000 35,000 Units sold 25,000 45,000 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 $ 5 Direct labor 8 Variable overhead 8 Fixed overhead ($350,000/35,000 units) 10 Total product cost per unit $ 31 Selling and administrative expenses consist of the following. 2016 2017 Variable selling and administrative expenses ($1.75 per unit) $ 43,750 $ 78,750 Fixed selling and administrative expenses 245,000 245,000 Total selling and administrative expenses $ 288,750 $ 323,750 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

The difference between the absorption costing and variable costing income for two years is shown in the following table:

Results of the excel sheet are as follows:

Note: Variable cost per unit includes direct material $5, direct labor $8 and variable overhead $8 per unit. Units produced in 2016 are 35,000 but units sold during 2016 are 25,000 so, 10,000 (35,000-25,000) units are ending inventory.