Question

Problem 06-1A 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 ($48 per unit)	$	1,152,000		$	2,112,000
Cost of goods sold ($33 per unit)		792,000			1,452,000
Gross margin		360,000			660,000
Selling and administrative expenses		282,000			317,000
Net income	$	78,000		$	343,000

Additional Information

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

	2018		2019
Units produced	34,000		34,000
Units sold	24,000		44,000

2. Variable cost per unit and total fixed costs are unchanged during 2018 and 2019. The company's $33 per unit product cost consists of the following.

Direct materials	$	5
Direct labor		8
Variable overhead		10
Fixed overhead ($340,000/34,000 units)		10
Total product cost per unit	$	33

3. Selling and administrative expenses consist of the following.

		2018			2019
Variable selling and administrative expenses ($1.75 per unit)	$	42,000		$	77,000
Fixed selling and administrative expenses		240,000			240,000
Total selling and administrative expenses	$	282,000		$	317,000

Problem 06-1A Part 2

2. Prepare a table as in Exhibit 6.12 to convert variable costing income to absorption costing income for both 2018 and 2019. (Loss amounts should be entered with a minus sign.)

Reconciliation of Variable Costing Income to Absorption Costing Income

Answer 1

	Variable costing:
	Unit product cost:
						$
	Direct materials					5
	Direct labor					8
	Variable manufacturing overhead					10
	Total					23
		Income statement
						2018	2019
	Sales revenue					1152000	2112000
	(Units sold*selling price)					(24000*48)	(44000*48)
	Less: variable Cost of goods sold					552000	1012000
	(Units sold*Product cost)					(24000*23)	(44000*23)
	Gross margin					600000	1100000
	Less:Variable selling and administrative expenses					42000	77000
	Contribution margin					558000	1023000
	Less:Fixed expenses
	Manufacturing overhead					340000	340000
	Selling and admin expense					240000	240000
	Operating income					-22000	443000
2	Reconciliation of Variable Costing Income to Absorption Costing Income:
								2018	2019
	Variable costing net income							-22000	443000
	Add:Fixed manufacturing overhead cost deferred in ending inventory						(Note:1)	100000
	Less:Fixed manufacturing overhead cost released from inventory						(Note:1)		-100000
	Absorption costing net income							78000	343000
	Note:1
					2018	2019
	Units produced			a	34000	34000
	Units sold			b	24000	44000
	Difference in units			c=a-b	10000	-10000
	Fixed MOH per unit			d	10	10
	Difference in fixed MOH			c*d	100000	-100000