Operating Data for Fowler Company and Its Absorption Costing Income

question 100

Essay

Operating data for Fowler Company and its absorption costing income statements for the last two years are presented below:
$\begin{array}{|l|r|r|} \hline& \text { Year 1 } & \text { Year 2 } \\\hline \text { Units in beginning inventory } & 0 & 3,000 \\\hline \text { Units produced } & 18,00 & 18,000 \\\hline \text { Units sold } & 15,000 & 20,000 \\\hline \text { Sales } & &\\\hline \text { Cost of goods sold: } & & \\\hline \text { Beginning inventory } & \$ 0 & \$ 30,000 \\\hline \begin{array}{l}\text { Add cost of goods } \\\text { manufactured }\end{array} & \underline{180,000} & \underline{180,000} \\\hline \text { Goods available for sale } & 180,00 & 210,000 \\\hline \text { Less ending inventory } & \underline{30,000} & \underline{10,000} \\\hline \text { Cost of goods sold } & 150,000 & 200,000 \\\hline \text { Gross margin } & 90,000 & 120,000 \\\hline \begin{array}{l}\text { Selling and administrative } \\\text { expense }\end{array} & \underline{80,000} & \underline{90,000} \\\hline \text { Operating income } & \$ 10,000 & \$ 30,000 \\\hline\end{array}$

Variable manufacturing costs are $6 per unit.Fixed manufacturing overhead totals $72,000 in each year.This overhead is applied at the rate of $4 per unit.Variable selling and administrative expenses were $2 per unit sold.
Required:
a)What was the unit product cost in each year under variable costing?
b)Prepare new income statements for each year using variable costing.
c)Reconcile the absorption costing and variable costing operating income for each year.

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Definitions:

Present Value

The present value of a sum of money or sequence of cash flows expected in the future, calculated using a certain rate of return.

Discounting

A financial process of determining the present value of a payment or a series of payments that will be made in the future.

Savings Account

A deposit account held at a financial institution that provides principal security and a modest interest rate.

Down Payment

An initial upfront portion of the total amount due, typically associated with the purchase of expensive items like cars or real estate.