Question

Trez Company began operations this year. During this first year, the company produced 100,000 units and sold 80,000 units. The absorption costing income statement for this year follows.

Sales (80,000 units × $40 per unit)				$	3,200,000
Cost of goods sold
Beginning inventory	$	0
Cost of goods manufactured (100,000 units × $20 per unit)		2,000,000
Cost of goods available for sale		2,000,000
Ending inventory (20,000 × $20)		400,000
Cost of goods sold					1,600,000
Gross margin					1,600,000
Selling and administrative expenses					560,000
Net income				$	1,040,000

Additional Information

1. Selling and administrative expenses consist of $400,000 in annual fixed expenses and $2 per unit in variable selling and administrative expenses.
2. The company's product cost of $20 per unit is computed as follows.

Direct materials	$	5		per unit
Direct labor	$	7		per unit
Variable overhead	$	2		per unit
Fixed overhead ($600,000 / 100,000 units)	$	6		per unit

1. Prepare an income statement for the company under variable costing.
2. Fill in the blanks.

Prepare an income statement for the company under variable costing. TREZ Company Variable Costing Income Statement Net income (loss)

Answer 1

Solution

TREZ Company
Variable Costing Income Statement
Sales		$   3,200,000.00
Less: Variable Cost
Direct Material	$ 400,000.00
Direct Labor	$ 560,000.00
Variable Overheads	$ 160,000.00
Variable selling and administrative expenses	$ 160,000.00
Total Variable cost		$   1,280,000.00
Contribution Margin		$   1,920,000.00
Less: Fixed Cost
Fixed manufacturing Overheads	$ 600,000.00
Fixed Selling and Administrative Expenses	$ 400,000.00
Total Fixed cost		$   1,000,000.00
Net Income		$      920,000.00

.

The dollar difference in variable costing and absorption costing income =

80000

Units x

$6

Fixed overhead per unit