Question

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 x \(50 per unit)		\)4,000,000
Cost of goods sold
Beginning inventory	\(0
Cost of goods manufactured (100,000 unit x \)30 per unit)	3,000,000
Ending inventory (20,000 x \(30)	600,000
Cost of goods sold		2,400,000
Gross margin		1,600,000
Selling and administrative expenses		530,000
Net income		\)1,070,000

Additional Information

a. Selling and administrative expenses consist of \(350,000 in annual fixed expenses and \)2.25 per unit in variable selling and administrative expenses.

b. The company’s product cost of \(30 per unit is computed as follows.

Direct materials	\)5 per unit
Direct labor	\(14 per unit
Variable overhead	\)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. Explain any difference between the income under variable costing (from part 1) and the income reported above.

Short answer

The net income of the company is$890,000.

Step-by-step solution

Meaning of Variable Costing

Variable costing is one of the methods used in the cost accounting branch to determine the price of a product produced. It only considers the variable expenses associated with the production of a product.

Preparation of income statement                

Trez Company
Variable Costing Income Statement
Particulars	Details	Amounts ($)
Sales		4,000,000
Less: Variable costs:
Direct material	80000*5	400,000
Direct labor	80000*14	1,120,000
Variable overhead	80000*2	160,000
Variable selling and administrative expenses	530000-350000	180,000
Contribution margin		2,140,000
Less: Fixed costs:
Fixed selling and administrative expenses		350,000
Fixed overhead		900,000
Net income		$890,000

Explanation of the difference

The absorption costing approach considers the cost associated with the beginning and endinginventory hence, it shows more income than thevariable costing approach of accounting.