In: Accounting
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
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.
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.