Rey Company’s single product sells at a price of $229 per unit. Data for its single product for its first year of operations follow. Direct materials $ 33 per unit Direct labor $ 41 per unit Overhead costs Variable overhead $ 11 per unit Fixed overhead per year $ 351,000 per year Selling and administrative expenses Variable $ 31 per unit Fixed $ 226,000 per year Units produced and sold 27,000 units 1. Prepare an income statement for the year using absorption costing2. Prepare an income statement for the year using variable costing.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Rey Company’s single product sells at a price of $229 per unit. Data for its single product for its first year of operations follow.
| Direct materials | $ | 33 | per unit |
| Direct labor | $ | 41 | per unit |
| Variable overhead | $ | 11 | per unit |
| Fixed overhead per year | $ | 351,000 | per year |
| Selling and administrative expenses | |||
| Variable | $ | 31 | per unit |
| Fixed | $ | 226,000 | per year |
| Units produced and sold | 27,000 | units | |
1. Prepare an income statement for the year using absorption costing
2. Prepare an income statement for the year using variable costing.
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