Question

Rey Company’s single product sells at a price of $234 per unit. Data for its single product for its first year of operations follow.

Direct materials	$	38	per unit
Direct labor	$	46	per unit
Overhead costs
Variable overhead	$	6	per unit
Fixed overhead per year	$	196,000	per year
Selling and administrative expenses
Variable	$	36	per unit
Fixed	$	236,000	per year
Units produced and sold		24,500	units

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

• Required 1
• Required 2

Prepare an income statement for the year using absorption costing.

Required 1
	REY COMPANY Absorption Costing Income Statement Sales Net income (loss)

• Required 1
• Required 2

Prepare an income statement for the year using variable costing.

Required 2
	REY COMPANY Variable Costing Income Statement 0 0 Net income (loss)

Answer 1

Ans. 1	In Absorption costing method, the cost of goods sold is the sum of all manufacturing costs
	whether it is fixed or variable.
	REY COMPANY
	Absorption Costing Income Statement
	PARTICULARS		Amount
	Sales   (24,500 * $234)		$5,733,000
	Less: Cost of goods sold :
	Direct materials ($38 * 24,500)	$931,000
	Direct labor ($46 * 24,500)	$1,127,000
	Variable Overhead ($6 * 24,500)	$147,000
	Fixed overhead	$196,000
	Cost of goods sold		$2,401,000
	Gross margin		$3,332,000
	Less: Selling & Administrative expenses:
	Fixed	$236,000
	Variable     ($36 * 24,500)	$882,000
	Total Selling and administrative expenses		$1,118,000
	Net operating income		$2,214,000
Ans. 2	In Variable costing method, only variable manufacturing costs are included in the calculations of cost
	of goods sold.
	REY COMPANY
	Variable Costing Income Statement
	PARTICULARS		Amount
	Sales   (24,500 * $234)		$5,733,000
	Less: Variable cost of goods sold:
	Direct materials ($38 * 24,500)	$931,000
	Direct labor ($46 * 24,500)	$1,127,000
	Variable Overhead ($6 * 24,500)	$147,000
	Variable cost of goods sold (total)		$2,205,000
	Gross Contribution Margin		$3,528,000
	Less: Variable Selling and Administrative Expenses   ($36 * 24,500)		$882,000
	Contribution Margin		$2,646,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$196,000
	Fixed selling and administrative expenses	$236,000	$432,000
	Net operating income		$2,214,000
	*Units produced and sold units are same (24,500) so the net operating income
	under both methods (Absorption and Variable) is equal.