Question

# Problem 06-2A Variable costing income statement and conversion to absorption costing income LO P2, P3 Trez...

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

1. Selling and administrative expenses consist of \$350,000 in annual fixed expenses and \$2 per unit in variable selling and administrative expenses.
2. The company's product cost of \$25 per unit is computed as follows.
 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.

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

1. Selling and administrative expenses consist of \$350,000 in annual fixed expenses and \$2 per unit in variable selling and administrative expenses.
2. The company's product cost of \$25 per unit is computed as follows.
 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.

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

1. Selling and administrative expenses consist of \$350,000 in annual fixed expenses and \$2 per unit in variable selling and administrative expenses.
2. The company's product cost of \$25 per unit is computed as follows.
 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.

 1 Variable Costing Income Statement Sales 3600000 Less: Variable costs Direct materials 400000 =80000*5 Direct labor 720000 =80000*9 Variable overhead 160000 =80000*2 Variable selling and administrative expenses 160000 =80000*2 Total variable costs 1440000 Contribution margin 2160000 Less: Fixed expenses Fixed overhead 900000 Fixed selling and administrative expenses 350000 Total Fixed expenses 1250000 Net income(loss) 910000
 2 The dollar difference in variable costing income and absorption costing income = 20000 units X 9 fixed overhead per unit

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