Question

In: Accounting

Problem 06-2A Variable costing income statement and conversion to absorption costing income LO P2, P3 Trez...

Problem 06-2A Variable costing income statement and conversion to absorption costing income LO P2, P3

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 × $45 per unit) $ 3,600,000
Cost of goods sold
Beginning inventory $ 0
Cost of goods manufactured (100,000 units × $25 per unit) 2,500,000
Cost of goods available for sale 2,500,000
Ending inventory (20,000 × $25) 500,000
Cost of goods sold 2,000,000
Gross margin 1,600,000
Selling and administrative expenses 510,000
Net income $ 1,090,000

  
Additional Information

  1. Selling and administrative expenses consist of $350,000 in annual fixed expenses and $2 per unit in variable selling and administrative expenses.
  2. The company's product cost of $25 per unit is computed as follows.
Direct materials $ 5 per unit
Direct labor $ 9 per unit
Variable overhead $ 2 per unit
Fixed overhead ($900,000 / 100,000 units) $ 9 per unit


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

Solutions

Expert Solution

Income Statement under Variable Costing Method
Sales (80000 units * $45 per unit) $3,600,000
Cost of goods sold
Beginning Inventory $0
Cost of goods manufactured (100000*$25) (A) $2,500,000
Cost of goods available for sale $2,500,000
Ending Inventory (20000*$16)(B) (Note 1) $320,000
Cost of goods sold (A-B) $2,180,000
Gross Margin $1,420,000
Selling & administration expenses $510,000
Net Income $910,000

Note 1

Product cost under variable costing Cost
Direct Material $5
Direct Labor $9
Variable Overhead $2
Product Cost   $16

The only difference between varaible costing and absorption costing is that under variable costing method closing inventory will be valued at prodcut cost excluding fixed factory overhead. While under absorption costing method while doing valuation of closing invetnory fixed overhead are considered for valuation.


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