Question

Trez Company began operations this year. During this year, the company produced 100,000 units and sold 80,000 units. The absorption costing income statement for this year follows.

Income Statement (Absorption Costing)
Sales (80,000 units × $50 per unit)
Cost of goods sold
Gross profit
Selling and administrative expenses
Income
$ 4,000,000
2,400,000
1,600,000
630,000
$ 970,000
Additional Information
a. Selling and administrative expenses consist of $450,000 in annual fixed expenses and $2.25 per unit in variable selling and administrative expenses.
b. The company's product cost of $30 per unit consists of the following.
Direct materials
Direct labor
Variable overhead
Fixed overhead ($700,000 / 100,000 units)
§ 4 per unit
$ 15 per unit
§ 4 per unit
$ 7 per unit
Required:
Prepare an income statement for the company under variable costing.

Answer 1

Answer: To prepare the income statement under variable costing, we need to separate the variable and fixed costs from the total cost of goods sold and selling and administrative expenses. Variable costing treats only the variable costs as product costs and considers fixed costs as period costs.

Given the following information:

Sales: 80,000 units × $50 per unit = $4,000,000

Direct materials: $4 per unit

Direct labor: $15 per unit

Variable overhead: $4 per unit

Fixed overhead: $700,000 / 100,000 units = $7 per unit

Variable selling and administrative expenses: $2.25 per unit

Fixed selling and administrative expenses: $450,000

Now, let's calculate the cost of goods sold and selling and administrative expenses under variable costing:

Cost of Goods Sold:

Variable cost of goods sold = (Direct materials + Direct labor + Variable overhead) × Number of units sold

Variable cost of goods sold = ($4 + $15 + $4) × 80,000 units = $2,600,000

Fixed cost of goods sold = Fixed overhead × Number of units sold

Fixed cost of goods sold = $7 × 80,000 units = $560,000

Total cost of goods sold = Variable cost of goods sold + Fixed cost of goods sold

Total cost of goods sold = $2,600,000 + $560,000 = $3,160,000

Selling and Administrative Expenses:

Variable selling and administrative expenses = Variable selling and administrative expenses per unit × Number of units sold

Variable selling and administrative expenses = $2.25 × 80,000 units = $180,000

Fixed selling and administrative expenses = Fixed selling and administrative expenses

Fixed selling and administrative expenses = $450,000

Total selling and administrative expenses = Variable selling and administrative expenses + Fixed selling and administrative expenses

Total selling and administrative expenses = $180,000 + $450,000 = $630,000

Now, we can prepare the income statement under variable costing:

Income Statement (Variable Costing)

Sales

Cost of goods sold

Gross profit

Selling and administrative expenses

Income

$4,000,000

$3,160,000

$840,000

$630,000

$210,000

Therefore, the income statement under variable costing shows a gross profit of $840,000 and a net income of $210,000.