Dowell Company produces a single product. Its income statements under absorption
ID: 2474355 • Letter: D
Question
Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow.
Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow.
M Chapter 19 Assignment × e Financial And Managerial A CSC : My Workspace Home | Find on page ezto.mheducation.com/hm.tp)x rum sets No results Options Chapter 19 Assignment instructions I help Questions 5- 6 (of 7) G Save & Exit | | Submit Save& Exit Submit The following information applies to the questions displayed below. Dowell Company produces a single product. Its Income statements under absorption costing for Its first two years of operation follow 2014 2015 Sales ($48 per unlt) Cost of goods sold ($33 per unit) $ 1,152,000 $ 2,112,000 792,000 1,452,000 Gross margin Selling and administrative expenses 360,000 294,000 660,000 339,000 Net Income $ 66,000 $ 321,000 a. Sales and production data for these first two years follow 2014 34,000 34,000 24,000 44,000 2015 Units produced Units sold b. Varlable cost per unlt and total fixed costs are unchanged during 2014 and 2015. The company's $33 per unit product cost consists of the following O Ask me anything 8:45 PM 4/24/2016Explanation / 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.
1)
DOWELL Company
Variable Costing Income Statements
2014
2015
Sales
$1,152,000
$2,112,000
Less: Variable Costs:
Direct Materials (Note 2)
$170,000
$170,000
Direct labor (Note 2)
$272,000
$272,000
Variable Overhead (Note 2)
$340,000
$340,000
Variable Production Cost
$782,000
$782,000
Add: Beginning Inventory (Note 1)
$0
$230,000
Less: Ending Inventory (Note 1)
($230,000)
$0
Variable Cost of Goods Sold
$552,000
$1,012,000
Add: Variable Selling and administrative expenses
$54,000
$99,000
Total Variable Cost
$606,000
$1,111,000
Contribution Margin
(Sales - Total Variable Costs)
$546,000
$1,001,000
Less: Fixed Expenses:
Fixed Overheads
$340,000
$340,000
Fixed Selling and administrative costs
$240,000
$240,000
Total Fixed Expenses
$580,000
$580,000
Net Income (loss)
[Contribution Margin - Total Fixed Expenses]
($34,000)
$421,000
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 = 34,000 – 24,000 = 10,000
Variable Production Cost 2014 = $782,000
Value of Ending Inventory 2014 = Variable Production Cost / Produced Units x Ending Inventory = $782,000 / 34,000 x 10,000 = $230,000
Beginning Inventory 2015 = Ending Inventory of 2014 = 10,000 Units and Value $230,000
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 = 34,000 x 5 = $170,000
Direct Labor Cost for 2014 & 2015 = Units Produced x Per Unit Cost = 34,000 x 8 = $272,000
Variable Overhead for 2014 & 2015 = Units Produced x Per Unit Cost = 34,000 x 10 = $340,000
Variable Selling and administrative expenses = Units Sold x Per Unit Cost
2014 = 24,000 x 2.25 = $54,000
2015 = 44,000 x 2.25 = $99,000
2)
To reconcile Variable Costing Income to Absorption Costing Income, we need to calculate Beginning Inventory and Ending Inventory as per Absorption Costing System.
Calculation of Ending Inventory 2014 as per Absorption Costing
(Note --- Absorption Costing includes Variable Manufacturing Expenses as well as Fixed manufacturing overheads in calculating the production cost. Resulting ending inventory includes the fixed overhead part as per absorption costing)
Units Produced in 2014 = 34,000 Units
Production Cost = Total Variable Cost Per Unit + Fixed Cost Per Unit = $33 per Unit
Fixed Cost Portion in Ending Inventory = Ending Inventory Units x Fixed Cost Per Unit = 10,000 Units x 10 = $100,000
Beginning Inventory in 2015 = ending inventory of 2014 = $100,000
DOWELL Company
Reconciliation of Variable Costing Income to Absorption Costing Income
2014
2015
Variable Costing Income (loss)
($34,000)
$421,000
Less: Fixed Overhead in beginning inventory
($100,000)
Add: Fixed Overhead in ending inventory
$100,000
Absorption Costing Income (loss)
$66,000
$321,000
DOWELL Company
Variable Costing Income Statements
2014
2015
Sales
$1,152,000
$2,112,000
Less: Variable Costs:
Direct Materials (Note 2)
$170,000
$170,000
Direct labor (Note 2)
$272,000
$272,000
Variable Overhead (Note 2)
$340,000
$340,000
Variable Production Cost
$782,000
$782,000
Add: Beginning Inventory (Note 1)
$0
$230,000
Less: Ending Inventory (Note 1)
($230,000)
$0
Variable Cost of Goods Sold
$552,000
$1,012,000
Add: Variable Selling and administrative expenses
$54,000
$99,000
Total Variable Cost
$606,000
$1,111,000
Contribution Margin
(Sales - Total Variable Costs)
$546,000
$1,001,000
Less: Fixed Expenses:
Fixed Overheads
$340,000
$340,000
Fixed Selling and administrative costs
$240,000
$240,000
Total Fixed Expenses
$580,000
$580,000
Net Income (loss)
[Contribution Margin - Total Fixed Expenses]
($34,000)
$421,000
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