Question

Dowell company produces a single product. Its income under variable costing for its first two years of operation follows. Variable costing income for year 1 is 36,000 and for year 2 is540,000. Additional information: Sales and production data for these first two years follow. Units produced for year 1 is 36,600 and for year 2 is 36,600. Units sold for year 1 is 26,000 and for year 2 is 47,200. The company's product cost per unit using absorption costing consists of the following: Direct materials cost is 6, direct labor cost is10, variable overhead cost is 8, and fixed overhead cost (360,000/36,000 units) is10. Prepare a statement to convert variable costing income to absorption costing income for both years.

Answer 1

To convert variable costing income to absorption costing income, add the fixed overhead cost to the variable costing income for each year.

Step-by-step explanation:

To convert variable costing income to absorption costing income, we need to consider the fixed overhead cost associated with each year. In year 1, the fixed overhead cost per unit is $10, and the number of units produced is 36,600, so the total fixed overhead cost is $366,000. In year 2, the total fixed overhead cost would also be $366,000. To calculate the absorption costing income, we add the fixed overhead cost to the variable costing income for each year:

Year 1: $36,000 (variable cost) + $366,000 (fixed cost) = $402,000 (absorption cost)

Year 2: $540,000 (variable cost) + $366,000 (fixed cost) = $906,000 (absorption cost)