Question

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 good 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					610,000
Net income				$	990,000

  
Additional Information

Selling and administrative expenses consist of $450,000 in annual fixed expenses and $2 per unit in variable selling and administrative expenses.

The company's product cost of $25 per unit is computed as follows.

Direct materials	$	4		per unit
Direct labor	$	11		per unit
Variable overhead	$	3		per unit
Fixed overhead ($700,000 / 100,000 units)	$	7		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

	TREZ Company
	Variable Costing Income Statement
	Sales		3600000		(80000*45)
	Less: Variable Cost of Goods Sold
	Direct Material	320000			(80000*4)
	Direct Labor	880000			(80000*11)
	Variable Manufacturing OH	240000			(80000*3)
	Total Variable Cost of Goods Sold		1440000
	Gross Contribution		2160000
	Less: Variable S&A Expense		160000		(80000*2)
	Net Contribution		2000000
	Less: Period Expense
	Fixed OH	700000
	S&A Expense	450000
	Total Period Expense		1150000
	Net Operating Income		850000
	Reconciliation of Variable Costing with Absorption Costing:
	Net Operating Income-Variable Cost		850000
	Add: Additional Fixed Cost Booked of Closing Inventory (20000*7)		140000
	Net Operating Income-Absorption Cost		990000