Question

In: Accounting

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

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) $ 1,012,000 $ 1,932,000
Cost of goods sold ($31 per unit) 682,000 1,302,000
Gross margin 330,000 630,000
Selling and administrative expenses 289,500 334,500
Net income $ 40,500 $ 295,500


Additional Information

  1. Sales and production data for these first two years follow.
2018 2019
Units produced 32,000 32,000
Units sold 22,000 42,000
  1. 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 $ 5
Direct labor 9
Variable overhead 7
Fixed overhead ($320,000/32,000 units) 10
Total product cost per unit $ 31
  1. Selling and administrative expenses consist of the following.
2018 2019
Variable selling and administrative expenses ($2.25 per unit) $ 49,500 $ 94,500
Fixed selling and administrative expenses 240,000 240,000
Total selling and administrative expenses $ 289,500 $ 334,500

Prepare income statements for the company for each of its first two years under variable costing.

Solutions

Expert Solution

Ans. In variable costing method, the unit product cost is the sum of only variable
manufacturing costs per unit
Unit product cost under Variable Costing:
Direct materials $5
Direct labor $9
Variable overhead $7
Total production cost per unit $21
DOWELL   COMPANY
Variable Costing
Income Statement
PARTICULARS 2018 2019
Sales    $1,012,000 $1,932,000
Less: Variable cost of goods sold:
Opening inventory $0 $210,000
Add: Cost of goods produced $672,000 $672,000
Variable cost of goods available for sale $672,000 $882,000
Less: Ending inventory -$210,000 $0
Variable cost of goods sold $462,000 $882,000
Gross Contribution Margin $550,000 $1,050,000
Less: Variable Selling and Administrative Expenses $49,500 $94,500
Contribution Margin $500,500 $955,500
Less: Fixed expenses:
Fixed manufacturing overhead $320,000 $320,000
Fixed selling and administrative expenses $240,000 $560,000 $240,000 $560,000
Net operating income    ($59,500) $395,500
*Cost of goods produced = Units produced * Unit product cost
2018 (3,2000 * $21) = $672,000
2019 (3,2000 * $21) = $672,000
Ending inventory units (2018) = Beginning inventory + Units produced - Units sold
2018   =    0 + 32,000 - 22,000   =   10,000
Cost of ending inventory = Ending inventory units * Unit product cost
2018   =   10,000 * $21   = $210,000
*Beginning inventory
2018 = $0
2019 (ending inventory of 2018) = $210,000   (units 10,000 * $21)
Ending inventory units (2019) = Beginning inventory + Units produced - Units sold
2019   =    10,000 + 32,000 - 42,000   =   0

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