Chapter 6, Problem 2PSA

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
Cost of goods manufactured (100,000 units x $30 per unit)	3,000,000
Cost of goods available for sale	3.000.000
Ending inventory (20.000 x $30)	600,030
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

1. Selling and administrative expenses consist of $350,000 in annual fixed expenses and $2.25 per unit in variable selling and administrative expenses.
2. The company’s product cost of $30 per unit is computed as follows.

Direct materials SS per unit

Direct labor $14 per unit

Variable overhead $2 per unit

Faced 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 I) and the income reported above.