Question

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

		2016			2017
Sales ($46 per unit)	$	920,000		$	1,840,000
Cost of goods sold ($31 per unit)		620,000			1,240,000
Gross margin		300,000			600,000
Selling and administrative expenses		285,000			330,000
Net income	$	15,000		$	270,000

Additional Information

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

	2016		2017
Units produced	30,000		30,000
Units sold	20,000		40,000

b. Variable cost per unit and total fixed costs are unchanged during 2016 and 2017. The company's $31 per unit product cost consists of the following.

Direct materials	$	5
Direct labor		9
Variable overhead		7
Fixed overhead ($300,000/30,000 units)		10
Total product cost per unit	$	31

c. Selling and administrative expenses consist of the following.

		2016			2017
Variable selling and administrative expenses ($2.25 per unit)	$	45,000		$	90,000
Fixed selling and administrative expenses		240,000			240,000
Total selling and administrative expenses	$	285,000		$	330,000

1. Complete income statements for the company for each of its first two years under variable costing. (Loss amounts should be entered with a minus sign.)

2. What are the differences between the absorption costing income and the variable costing income for these two years? (Loss amounts should be entered with a minus sign.)

Answer 1

1
	2016	2017
Sales	920000	1840000
Less: Variable costs
Direct materials	100000	200000
Direct labor	180000	360000
Variable overhead	140000	280000
Variable selling and administrative expenses	45000	90000
Total variable costs	465000	930000
Contribution margin	455000	910000
Less: Fixed expenses
Fixed overhead	300000	300000
Fixed selling and administrative expenses	240000	240000
Total Fixed expenses	540000	540000
Net income(loss)	-85000	370000
2
	2016	2017
Variable costing income(loss)	-85000	370000
Add: Fixed overhead in ending inventory	100000
Less: Fixed overhead in beginning inventory		-100000
Absorption costing income(loss)	15000	270000