Question

Problem 19-2A 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 × $40 per unit)				$	3,200,000
Cost of goods sold
Beginning inventory	$	0
Cost of goods manufactured (100,000 units × $20 per unit)		2,000,000
Cost of good available for sale		2,000,000
Ending inventory (20,000 × $20)		400,000
Cost of goods sold					1,600,000
Gross margin					1,600,000
Selling and administrative expenses					590,000
Net income				$	1,010,000

  
Additional Information

Selling and administrative expenses consist of $450,000 in annual fixed expenses and $1.75 per unit in variable selling and administrative expenses.

The company's product cost of $20 per unit is computed as follows.

Direct materials	$	4		per unit
Direct labor	$	5		per unit
Variable overhead	$	3		per unit
Fixed overhead ($800,000 / 100,000 units)	$	8		per unit
Required: 1. Prepare an income statement for the company under variable costing. TREZ Company Variable Costing Income Statement Net income (loss)

Answer 1

• All working forms part of the answer
• Variable costing income statement is provided below

	Units	Rate per unit	Amount
Sales Revenue	80000	$                40.00	$    32,00,000.00
(-) variable costs
Direct materials	80000	$                  4.00	$      3,20,000.00
Direct Labor	80000	$                  5.00	$      4,00,000.00
Variable Overhead	80000	$                  3.00	$      2,40,000.00
variable selling & administrative expense	80000	$                  1.75	$      1,40,000.00
Total variable cost	80000	$                13.75	$    11,00,000.00
Contribution margin	80000	$                26.25	$    21,00,000.00
(-) Fixed Cost
Fixed manufacturing overhead			$      8,00,000.00
Fixed Selling & administrative expenses			$      4,50,000.00
Total fixed cost			$    12,50,000.00
Net Income			$      8,50,000.00