Question

Problem 06-1A Variable costing income statement and conversion to absorption costing income (two consecutive years) LO P2, P3

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.)

Answer 1

variable costing income statement:-

particulars	2018($)	2019($)
sales(i)	1152000	2112000
less:variable cost of goods sold:
opening inventory	0	230000
variable cost of goods manufactured	782000	782000
variable cost of goods available for sale(ii)	782000	1012000
closing inventory(iii)	230000	0
variable cost of goods sold(iv=ii-iii)	552000	1012000
gross contribution margin(i-iv)	600000	1100000
less:variable selling and administrative expenses	42000	77000
contribution margin	558000	1023000
less:fixed expenses:
fixed selling and administrative expenses	240000	240000
fixed overhead	340000	340000
net operating income	-22000	443000

note:-

1)closing inventory of 2018 is the opening inventory of 2019.