Question

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

Rey Company’s single product sells at a price of $231 per unit. Data for its single product for its first year of operations follow.

Direct materials	$	35	per unit
Direct labor	$	43	per unit
Overhead costs
Variable overhead	$	9	per unit
Fixed overhead per year	$	286,000	per year
Selling and administrative expenses
Variable	$	33	per unit
Fixed	$	230,000	per year
Units produced and sold		26,000	units

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

	REY COMPANY Absorption Costing Income Statement Net income (loss)

	REY COMPANY Variable Costing Income Statement Net income (loss)

Answer 1

1.

REY COMPANY
Absorption Costing Income Statement
Sales ($231*26,000)		$ 6,006,000
Less: Cost of goods sold
Direct material ($35*26,000)	$     910,000
Direct Labor ($43*26,000)	$ 1,118,000
Variable overhead ($9*26,000)	$     234,000
Fixed overhead	$     286,000
Total cost of goods sold		$ 2,548,000
Gross profit		$ 3,458,000
Less: Selling and administrative expenses
Variable ($33*26,000)	$     858,000
Fixed	$     230,000
Total selling and administrative expenses		$ 1,088,000
Net income		$ 2,370,000

2.

REY COMPANY
Variable costing income statement
Sales ($231*26,000)		$ 6,006,000
Less: Variable expenses
Direct material ($35*26,000)	$     910,000
Direct Labor ($43*26,000)	$ 1,118,000
Variable overhead ($9*26,000)	$     234,000
Variable selling and administrative expenses ($33*26,000)	$     858,000
Total variable expenses		$ 3,120,000
Contribution margin		$ 2,886,000
Less: Fixed expenses
Fixed overhead	$     286,000
Fixed selling and administrative expenses	$     230,000
Total fixed expenses		$     516,000
Net income		$ 2,370,000

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