Question

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. Prepare an income statement for the year assuming:

(a) absorption costing and

(b) variable costing.

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

Short answer

1. Net income under absorption costing is$2,520,000.
2. Net income under variable costing is $2,520,000.

Step-by-step solution

Meaning of Net Income

In accounting, net income refers to the amount of money left with a business entity after the settlement all its expenses such as selling & administrative, interest, and taxes. Net income is computed by subtracting theoperating and non-operating costs from the total revenues

Preparation of income statement under absorption costing

Ray Company
Income Statement (Absorption Costing)
Particulars	Description	Amounts ($)
Sales	(20000*216)	$4,320,000
Cost of goods sold
Direct material	(20000*20)	400,000
Direct labor	(20000*28)	560,000
Variable overhead	(20000*6)	120,000
Fixed overhead cost		160,000
Gross profit		$3,080,000
Selling and administrative expenses
Variable	(20000*18)	360,000
Fixed		200,000
Net income		$2,520,000

Preparation of income statement under variable costing

Ray Company
Income Statement (Variable Costing)
Particulars	Description	Amounts ($)
Sales	(20000*216)	$4,320,000
Variable costs:
Direct materials	(20000*20)	400,000
Direct labor	(20000*28)	560,000
Variable overhead	(20000*6)	120,000
Variable selling and administrative expenses	(20000*18)	360,000
Contribution margin		$2,880,000
Fixed costs:
Fixed overhead		160,000
Fixed selling and administrative expenses		200,000
Net income		$2,520,000