Question

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

  
Additional Information

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

  
Additional Information

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

  
Additional Information

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.

Answer 1

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