Rey Company’s single product sells at a price of $225 per unit. Data for its single product for its first year of operations follow. Direct materials $ 29 per unit Direct labor $ 37 per unit Overhead costs Variable overhead $ 15 per unit Fixed overhead per year $ 493,000 per year Selling and administrative expenses Variable $ 27 per unit Fixed $ 218,000 per year Units produced and sold 29,000 units 1. Prepare an income statement for the year using absorption costing 2. Prepare an income statement for the year using variable costing.

Part 1. Prepare an income statement for the year using absorption costing

Sales ($225×29,000)                                                                         6,525,000

Less Cost of Sales

Opening Stock                                                                         0

Add Cost of Manufactured Goods ($95.83×29,000)    2,842,000

Less Closing Stock                                                                   0        2,842,000

Gross Profit                                                                                          3,683,000

Less Expenses

Selling and Administrative Expenses:

Variable ($27×29,000)                                                                           783,000

Fixed 493,000                                                                                        218,000

Net Income                                                                                          2,682,000

Part 2. Prepare an income statement for the year using variable costing

Sales ($225×29,000)                                                                         6,525,000

Less Cost of Sales

Opening Stock                                                                         0

Add Cost of Manufactured Goods ($81.00×29,000)    2,349,000

Less Closing Stock                                                                   0        2,349,000

Contribution                                                                                         4,176,000

Less Expenses

Fixed Manufacturing Costs                                                                    493,000

Selling and Administrative Expenses:

Variable ($27×29,000)                                                                           783,000

Fixed 493,000                                                                                         218,000

Net Income                                                                                          2,682,000

Explanation:

Part 1. Prepare an income statement for the year using absorption costing

Absorption Costing, also known as Full Costing includes Fixed Manufacturing as part of Product Cost.

All Non - Manufacturing Costs are then Presented as Period Costs

Product Cost Per Unit:

Direct materials                                    29.00

Direct labor                                           37.00

Variable overhead                                15.00

Fixed Overhead 430000/29000        14.83

Total Product Cost                               95.83

Part 2. Prepare an income statement for the year using variable costing

Variable Costing, also known as Marginal Costing only includes Variable Manufacturing Costs as part of Product Costs

Fixed Manufacturing and All Non - Manufacturing Costs are then Presented as Period Costs.

Product Cost Per Unit:

Direct materials                                    29.00

Direct labor                                           37.00

Variable overhead                                15.00

Total Product Cost                                81.00

absorption cost

Sales revenue       6,525,000

COGS                    (2,842,000)

Gross Profit             3,683,000

S&A expense           (1,001,000)  

Operating Income     2,682,000

variable cost

Sales revenue       6,525,000

Variable Cost         (3,132,000)

Contribution           3,393,000

Fixed Cost                  (711,000)

Net Income             2,682,000

Explanation:

Under absorption cost all the fixed cost are capitalized:

units cost:

493,000 / 29,000 units = 17 unit fixed overhead cost

29 materials + 37 labor + 15 varaible overhead 17 fixed overhead = 98 unit cost

Sales revenue 29,000 x 225 = 6,525,000

COGS               29,000 x   98 =(2,842,000)

Gross Profit                                3,683,000

Selling and adminsitrative cost:

27 x 29,000 + 218,000 =            (1,001,000)  

Operating Income                       2,682,000

Variable cost:

29 materials + 37 labor + 15 varaible overhead + 27 S&A = 108 unit cost

Sales revenue 29,000 x 225  =  6,525,000

Variable Cost     29,000 x 108 =(3,132,000)

Contribution                                 3,393,000

Fixed Cost  493,000 + 218,000 =  (711,000)

Net Income                                  2,682,000    

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