Question

Problem 19-1A Variable costing income statement and conversion to absorption costing income (two consecutive years) LO P2, P3

[The following information applies to the questions displayed below.]

Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow.

		2018			2019
Sales ($46 per unit)	$	966,000		$	1,886,000
Cost of goods sold ($31 per unit)		651,000			1,271,000
Gross margin		315,000			615,000
Selling and administrative expenses		292,500			342,500
Net income	$	22,500		$	272,500

Additional Information

1. Sales and production data for these first two years follow.

	2018		2019
Units produced	31,000		31,000
Units sold	21,000		41,000

2. Variable cost per unit and total fixed costs are unchanged during 2018 and 2019. The company's $31 per unit product cost consists of the following.

Direct materials	$	4
Direct labor		8
Variable overhead		9
Fixed overhead ($310,000/31,000 units)		10
Total product cost per unit	$	31

3. Selling and administrative expenses consist of the following.

		2018			2019
Variable selling and administrative expenses ($2.5 per unit)	$	52,500		$	102,500
Fixed selling and administrative expenses		240,000			240,000
Total selling and administrative expenses	$	292,500		$	342,500

Problem 19-1A Part 1

1. Prepare 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 2018 2019 Net income (loss)

Answer 1

Req 1	DOWELL Company
	Variable Costing Income Statement
		2018	2019
	Sales	966,000	1,886,000
	Less: Variable costs
	Direct materials	84,000	164,000
	Direct labor	168,000	328,000
	Variable overhead costs	189,000	369,000
	Variable selling and administrative expenses	52,500	102,500
	Total variable costs	493,500	963,500
	Contribution margin	472,500	922,500
	Less: Fixed expenses
	Fixed selling and administrative costs	24,000	240,000
	Fixed overhead costs	310,000	310000
	Total fixed expenses	334,000	550,000
	Net income (loss)	138,500	372,500
Req 2	Reconciliation of Variable costing and Absorption Costing Income
		2018	2019
	Variable costing net operating income	138,500	372,500
	Add: Fixed Overhead in ending inventory	100,000
	Less: Fixed Overhead in begining inventory		(100,000)
	Absorption costing net income(loss)	238,500	272,500