Dowell Company produces a single product. Its income statements under absorption
ID: 2472081 • Letter: D
Question
Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow 2014 2015 Sales ($44 per unit) Cost of goods sold ($29 per unit) $ 1,012,000 $ 1,892,000 667,000 1,247,000 Gross margin Selling and administrative expenses 345,000 291,750 645,000 336,750 Net income $ 53,250 308,250 Additional Information a. Sales and production data for these first two years follow 2014 33,000 33,000 23,000 43,000 2015 Units produced Units sold b. Variable cost per unit and total fixed costs are unchanged during 2014 and 2015. The company's $29 per unit product cost consists of the following Direct materials Direct labor Variable overhead Fixed overhead ($330,000/33,000 units) 8 5 10 Total product cost per unit $29Explanation / Answer
Solution:
First of all we need to know about Variable Costing
- Under Variable Costing System, variable manufacturing costs such as direct material, direct labor and variable manufacturing overheads are treated as the cost of product.
- Under Variable Costing, the value of finished goods and work in process is also comprised only of Variable Costs.
- Variable Selling and distribution expenses are excluded for valuing the inventories.
- Fixed Costs are not considered for valuation of closing stock of finished goods.
DOWELL Company
Variable Costing Income Statements
2014
2015
Sales
$1,012,000
$1,892,000
Less: Variable Costs:
Direct Materials (Note 2)
$198,000
$198,000
Direct labor (Note 2)
$264,000
$264,000
Variable Overhead (Note 2)
$165,000
$165,000
Variable Production Cost
$627,000
$627,000
Add: Beginning Inventory (Note 1)
$0
$190,000
Less: Ending Inventory (Note 1)
- $190,000
$0
Variable Cost of Goods Sold
$437,000
$817,000
Add: Variable Selling and administrative expenses
$51,750
$96,750
Total Variable Cost
$488,750
$913,750
Contribution Margin (Sales - Total Variable Costs)
$523,250
$978,250
Less: Fixed Expenses:
Fixed Overheads
$330,000
$330,000
Fixed Selling and administrative costs
$240,000
$240,000
Total Fixed Expenses
$570,000
$570,000
Net Income (loss) [Contribution Margin - Total Fixed Expenses]
- $46,750
$408,250
Note 1 – Under Variable Costing, Beginning inventory is valued at the variable production cost of last period.
And Ending Inventory is valued at current variable production cost.
Ending Inventory 2014 = Produced Units – Sold Units = 33,000 – 23,000 = 10,000
Variable Production Cost 2014 = $627,000
Value of Ending Inventory 2014 = Variable Production Cost / Produced Units x Ending Inventory = $627,000 / 33,000 x 10,000 = $190,000
Beginning Inventory 2015 = Ending Inventory of 2014 = 10,000 Units and Value $190,000
Ending Inventory 2015 = beginning inventory + Units Produced – Unit Sold = 10,000 + 33,000 – 43,000 = 0
Note 2:
Direct Material Cost for 2014 & 2015 = Units Produced x Per Unit Cost = 33,000 x 6 = $198,000
Direct Labor Cost for 2014 & 2015 = Units Produced x Per Unit Cost = 33,000 x 8 = $264,000
Variable Overhead for 2014 & 2015 = Units Produced x Per Unit Cost = 33,000 x 5 = $165,000
Variable Selling and administrative expenses = Units Sold x Per Unit Cost
2014 = 23,000 x 2.25 = $51,750
2015 = 43,000 x 2.25 = $96,750
DOWELL Company
Variable Costing Income Statements
2014
2015
Sales
$1,012,000
$1,892,000
Less: Variable Costs:
Direct Materials (Note 2)
$198,000
$198,000
Direct labor (Note 2)
$264,000
$264,000
Variable Overhead (Note 2)
$165,000
$165,000
Variable Production Cost
$627,000
$627,000
Add: Beginning Inventory (Note 1)
$0
$190,000
Less: Ending Inventory (Note 1)
- $190,000
$0
Variable Cost of Goods Sold
$437,000
$817,000
Add: Variable Selling and administrative expenses
$51,750
$96,750
Total Variable Cost
$488,750
$913,750
Contribution Margin (Sales - Total Variable Costs)
$523,250
$978,250
Less: Fixed Expenses:
Fixed Overheads
$330,000
$330,000
Fixed Selling and administrative costs
$240,000
$240,000
Total Fixed Expenses
$570,000
$570,000
Net Income (loss) [Contribution Margin - Total Fixed Expenses]
- $46,750
$408,250
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