Question

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

Rey Company’s single product sells at a price of $236 per unit. Data for its single product for its first year of operations follow.

Direct materials	$	40	per unit
Direct labor	$	48	per unit
Overhead costs
Variable overhead	$	4	per unit
Fixed overhead per year	$	141,000	per year
Selling and administrative expenses
Variable	$	38	per unit
Fixed	$	240,000	per year
Units produced and sold		23,500	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 0 0 Net income (loss)

Answer 1

Requirement 1:

REY COMPANY
Absorption Costing Income Statement
Sales [23,500 units x $236]		$ 5,546,000
Cost of goods Sold:
Direct material [23,500 units x $40]	$ 940,000
Direct labor [23,500 units x $48]	$ 1,128,000
Manufacturing overhead:
Variable overhead [23,500 x $4]	$ 94,000
Fixed overhead	$ 141,000
Cost of goods sold		$ 2,303,000
Gross profit		$ 3,243,000
(Less): Selling and administrative expense
Variable [23,500 x $38]	$ 893,000
Fixed	$ 240,000
Total selling and administrative expense		$ 1,133,000
Net Income		$ 2,110,000

Requirement 2:

REY COMPANY
Variable Costing Income Statement
Sales [23,500 units x $236]		$ 5,546,000
Variable cost of goods sold:
Direct material [23,500 units x $40]	$ 940,000
Direct labor [23,500 units x $48]	$ 1,128,000
Variable manufacturing overhead [23,500 x $4]	$ 94,000
Variable Selling and administrative expenses[23,500 x $38]	$ 893,000
Total variable cost of goods sold		$ 3,055,000
Contribution margin		$ 2,491,000
(Less): Fixed expenses
Fixed manufacturing overhead	$ 141,000
Fixed selling and Administrative expense	$ 240,000
Total fixed expenses		$ 381,000
Net Income		$ 2,110,000