Dowell Company produces a single product. Its income statement under absorption costing for its first two years of operation follow.
2012 2013
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 . . . . . . . ...... . 290,000........................ 340,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . ..... . . $ 10,000....................... $ 260,000
Additional Information
a. Sales and production data for these first two years follow.
2012 2013
Units produced . . . . . . .......... . 30,000................. 30,000
Units sold . . . . . . . . . . . .......... . 20,000................. 40,000
b. Variable cost per unit and total fixed costs are unchanged during 2012 and 2013. 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.
2012 2013
Variable selling and administrative ($2.50 per unit) . . . . . $ 50,000....................... $100,000
Fixed selling and administrative . . . . . . . . . . . . . . . . . . . . 240,000......................... 240,000
Total selling and administrative . . . . . . . . . . . . . . . . . . .. $290,000........................ $340,000
Required
1. Prepare income statements for the company for each of its first two years under variable costing.
2. Explain any difference between the absorption costing income and the variable costing income for these two years.