Question

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

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	$	5
Direct labor		9
Variable overhead		7
Fixed overhead ($320,000/32,000 units)		10
Total product cost per unit	$	31

3. Selling and administrative expenses consist of the following.

		2018			2019
Variable selling and administrative expenses ($2.25 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.

Answer 1

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