Problem 19-2A Variable costing income statement and conversion to absorption cos

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.

  
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.

Required:
1. Prepare an income statement for the company under variable costing.

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

Explanation / Answer

Answer

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

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

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