Selling and Administrative Expenses

Oct 13, 2025 by wbrum.org 45 views

Introduction

Variable costing is a method of costing that only includes variable costs in the product's cost of goods sold. It is a widely used method in manufacturing companies, especially those that produce a single product. In this article, we will be discussing the income of Dowell Company under variable costing for its first two years of operation.

Variable Costing Income

Variable costing income is the income that a company earns after deducting the variable costs from the sales revenue. The variable costs include direct materials, direct labor, and variable overheads. The income under variable costing is calculated as follows:

Income = Sales Revenue - Variable Costs

Dowell Company's Income Under Variable Costing

The income of Dowell Company under variable costing for its first two years of operation is as follows:

Variable Costing Income	Year 1	Year 2
Income	$100,000	$120,000
Variable Costs	$50,000	$60,000
Selling and Administrative Expenses	$20,000	$25,000
Net Income	$30,000	$35,000

Analysis of Variable Costing Income

From the above table, we can see that the income of Dowell Company under variable costing has increased from $30,000 in Year 1 to $35,000 in Year 2. This is a 16.67% increase in income.

Breakdown of Variable Costs

The variable costs of Dowell Company include direct materials, direct labor, and variable overheads. The breakdown of variable costs for the first two years of operation is as follows:

Variable Costs	Year 1	Year 2
Direct Materials	$20,000	$25,000
Direct Labor	$15,000	$18,000
Variable Overheads	$15,000	$17,000
Total Variable Costs	$50,000	$60,000

Discussion

The income of Dowell Company under variable costing has increased from $30,000 in Year 1 to $35,000 in Year 2. This is a 16.67% increase in income. The variable costs have also increased from $50,000 in Year 1 to $60,000 in Year 2. This is a 20% increase in variable costs.

Conclusion

In conclusion, the income of Dowell Company under variable costing has increased from $30,000 in Year 1 to $35,000 in Year 2. This is a 16.67% increase in income. The variable costs have also increased from $50,000 in Year 1 to $60,000 in Year 2. This is a 20% increase in variable costs.

Recommendations

Based on the analysis of variable costing income, the following recommendations can be made:

The company should continue to increase its sales revenue to increase its income.
The company should also continue to reduce its variable costs to increase its income.
The company should also consider implementing cost-saving measures to reduce its variable costs.

Limitations of Variable Costing

Variable costing has several limitations. Some of the limitations of variable costing include:

It does not include fixed costs in the product's cost of goods sold.
It does not include the opportunity cost of using resources in the product's cost of goods sold.
It does not include the cost of capital in the product's cost of goods sold.

Conclusion

Introduction

Q&A Guide

Q: What is variable costing?

A: Variable costing is a method of costing that only includes variable costs in the product's cost of goods sold.

Q: What are variable costs?

A: Variable costs are costs that vary with the level of production. They include direct materials, direct labor, and variable overheads.

Q: What is the difference between variable costing and absorption costing?

A: The main difference between variable costing and absorption costing is that absorption costing includes fixed costs in the product's cost of goods sold, while variable costing only includes variable costs.

Q: What are the advantages of variable costing?

A: The advantages of variable costing include:

It is a simple and easy-to-use method of costing.
It provides a clear picture of the company's profitability.
It helps to identify areas where costs can be reduced.

Q: What are the disadvantages of variable costing?

A: The disadvantages of variable costing include:

It does not include fixed costs in the product's cost of goods sold.
It does not include the opportunity cost of using resources in the product's cost of goods sold.
It does not include the cost of capital in the product's cost of goods sold.

Q: How is variable costing income calculated?

A: Variable costing income is calculated as follows:

Income = Sales Revenue - Variable Costs

Q: What is the income of Dowell Company under variable costing for its first two years of operation?

A: The income of Dowell Company under variable costing for its first two years of operation is as follows:

Variable Costing Income	Year 1	Year 2
Income	$100,000	$120,000
Variable Costs	$50,000	$60,000
Selling and Administrative Expenses	$20,000	$25,000
Net Income	$30,000	$35,000

Q: What is the breakdown of variable costs for the first two years of operation?

A: The breakdown of variable costs for the first two years of operation is as follows:

Variable Costs	Year 1	Year 2
Direct Materials	$20,000	$25,000
Direct Labor	$15,000	$18,000
Variable Overheads	$15,000	$17,000
Total Variable Costs	$50,000	$60,000

Conclusion

In conclusion, variable costing is a widely used method of costing that only includes variable costs in the product's cost of goods sold. The income of Dowell Company under variable costing has increased from $30,000 in Year 1 to $35,000 in Year 2. This is a 16.67% increase in income. The variable costs have also increased from $50,000 in Year 1 to $60,000 in Year 2. This is a 20% increase in variable costs.

Recommendations

Based on the analysis of variable costing income, the following recommendations can be made:

The company should continue to increase its sales revenue to increase its income.
The company should also continue to reduce its variable costs to increase its income.
The company should also consider implementing cost-saving measures to reduce its variable costs.

Limitations of Variable Costing

Variable costing has several limitations. Some of the limitations of variable costing include:

It does not include fixed costs in the product's cost of goods sold.
It does not include the opportunity cost of using resources in the product's cost of goods sold.
It does not include the cost of capital in the product's cost of goods sold.