Question

Exercise 19-5 Absorption costing and variable costing income statements LO P2

Rey Company’s single product sells at a price of $216 per unit. Data for its single product for its first year of operations follow.

Direct materials	$	20	per unit
Direct labor	$	28	per unit
Overhead costs
Variable overhead	$	6	per unit
Fixed overhead per year	$	160,000	per year
Selling and administrative expenses
Variable	$	18	per unit
Fixed	$	200,000	per year
Units produced and sold		20,000	units

1. Prepare an income statement for the year using absorption costing
2. Prepare an income statement for the year using variable costing.

Answer 1

1.

Rey Company’s
Absorption Costing Income Statement
Sales (20,000 x 216)		$4,320,000
Cost of goods sold:
Direct materials ( 20,000 x 28)	560,000
Direct labor ( 20,000 x 20)	400,000
Variable overhead ( 20,000 x 6)	120,000
Fixed overhead	160,000
Cost of goods sold		-1,240,000
Gross profit		$3,080,000
Operating expenses:
Variable selling and administrative expenses ( 20,000 x 18)	360,000
Fixed selling and administrative expenses	200,000
Total operating expense		-560,000
Net Income		$2,520,000

2.

Rey Company’s
Variable costing Income Statement
Sales (20,000 x 216)		$4,320,000
Less: Variable expense:
Direct materials ( 20,000 x 28)	560,000
Direct labor ( 20,000 x 20)	400,000
Variable overhead ( 20,000 x 6)	120,000
Variable selling and administrative expenses ( 20,000 x 18)	360,000
Total Variable expenses		-1,440,000
Contribution margin		$2,880,000
Less: Fixed expense:
Fixed overhead	160,000
Fixed selling and administrative expenses	200,000
Total fixed expenses		-360,000
Net Income		$2,520,000