Question

Exercise 06-5 Absorption costing and variable costing income statements LO P2 Rey Company’s single product sells at a price of $216 per unit. Data for its single product for its first year of operations follow. Direct materials $ 20 per unit Direct labor $ 28 per unit Overhead costs Variable overhead $ 6 per unit Fixed overhead per year $ 160,000 per year Selling and administrative expenses Variable $ 18 per unit Fixed $ 200,000 per year Units produced and sold 20,000 units 1. Prepare an income statement for the year using absorption costing 2. Prepare an income statement for the year using variable costing.

Answer 1

Answer:

1. Income statement for the year

using Absorption Costing

Selling price ( 20,000 x $216 )                          $4,320,000

Direct materials ( 20,000 x $20 )   $400,000

Direct labor ( 20,000 x $28 )          $560,000

Variable overhead ( 20,000 x $6 ) $120,000

Fixed overhead                                $160,000

Total Production Cost                                      ($1,240,000)

Gross Profit                                                        $3,080,000

Selling and Admin Expenses

Variable Cost ( 20,000 x $18)         $360,000

Fixed Cost                                        $200,000  

Total Period Cost                                              ($560,000)

Operating Income                                             $2,520,000

2. Income statement for the year

using Variable Costing

Selling price ( 20,000 x $216 )                          $4,320,000

Direct materials ( 20,000 x $20 )   $400,000

Direct labor ( 20,000 x $28 )          $560,000

Variable overhead ( 20,000 x $6 ) $120,000

Variable Cost S&A ( 20,000 x $18) $360,000

Variable Production Cost                                 ($1,440,000)

Contribution Margin                                          $2,880,000

Fixed Cost

Production overhead cost              $160,000

Fixed Cost S&A                               $200,000  

                                                                          ($360,000)

Operating Income                                             $2,520,000

Explanation:

Variable and absorption costing income statement have difference of treatment of Variable and Fixed costs as production cost and period cost.

Variable costing consider all variable costs as production cost and Absorption costing consider all the cost incurred in production either variable or fixed as production cost.