Chapter 1 Drive pter 19-Homework Help Sa 2 Required information The folowing inf
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Chapter 1 Drive pter 19-Homework Help Sa 2 Required information The folowing information applies to the questions displayed belowj Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow Cost of goods sold (831 per unit) 2-000132,00 Selling and adniniatrative expenses Additional Information a. Sales and production data for these first two years follow. 2016 2017 Uaits produced Dnits sold 2040 42,000 b. Variable cost per unit and total fiwed costs are unchanged during 2016 and 2017. The company's 531 per unit pr cost consists of the following Direot materials Direet labor iable overhead Fixed overhead (9320,003/32,000 is Total product eost per unit 10 531Explanation / Answer
DOWELL COMPANY
Variable Costing Income Statement
2016
2017
Sales
$ 1,012,000.00
$ 1,932,000.00
Less: Variable Cost
Direct material
$ 110,000.00
$ 210,000.00
Direct Labor
$ 176,000.00
$ 336,000.00
Variable Overheads
$ 176,000.00
$ 336,000.00
Variable selling and Administrative expenses
$ 55,000.00
$ 105,000.00
Total Variable cost
$ 517,000.00
$ 987,000.00
Contribution Margin
$ 495,000.00
$ 945,000.00
Less: Fixed Cost
Fixed manufacturing Overheads
$ 320,000.00
$ 320,000.00
Fixed Selling and Administrative Expenses
$ 245,000.00
$ 245,000.00
Total Fixed cost
$ 565,000.00
$ 565,000.00
Net Income
$ (70,000.00)
$ 380,000.00
DOWELL COMPANY
Reconciliation of Variable costing and Absorption Costing system
2016
2017
variable Costing Income (loss)
$ (70,000.00)
$ 380,000.00
Add/(Less): fixed overheads applied to Inventory in Absorption costing (10*10000 Units)
$ 100,000.00
$ (100,000.00)
Absorption Costing Income
$ 30,000.00
$ 280,000.00
$100000 of Fixed manufacturing Overheads are applied to inventory in 2016 which increased profit as per absorption costing. Since in absorption costing the cost of unsold stock is not included in income statement but shown as an asset under WIP inventory or finished inventory. In variable costing fixed cost is charged as period cost and no fixed cost is assigned to unsold inventory.
$100000 deducted in 2017 represents the cost of opening inventory (Applied fixed overheads part) in absorption costing but there was no such thing done as per variable costing so that amount is deducted from variable costing profit to get profit as per absorption system.
DOWELL COMPANY
Variable Costing Income Statement
2016
2017
Sales
$ 1,012,000.00
$ 1,932,000.00
Less: Variable Cost
Direct material
$ 110,000.00
$ 210,000.00
Direct Labor
$ 176,000.00
$ 336,000.00
Variable Overheads
$ 176,000.00
$ 336,000.00
Variable selling and Administrative expenses
$ 55,000.00
$ 105,000.00
Total Variable cost
$ 517,000.00
$ 987,000.00
Contribution Margin
$ 495,000.00
$ 945,000.00
Less: Fixed Cost
Fixed manufacturing Overheads
$ 320,000.00
$ 320,000.00
Fixed Selling and Administrative Expenses
$ 245,000.00
$ 245,000.00
Total Fixed cost
$ 565,000.00
$ 565,000.00
Net Income
$ (70,000.00)
$ 380,000.00
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