Question

Denton Company manufactures and sells a single product. Cost data for the product are given:

Variable costs per unit:
Direct materials			$	4
Direct labor				10
Variable manufacturing overhead				2
Variable selling and administrative				3
Total variable cost per unit			$	19
Fixed costs per month:
Fixed manufacturing overhead	$	75,000
Fixed selling and administrative		166,000
Total fixed cost per month	$	241,000

The product sells for $50 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	15,000	11,000
August	15,000	19,000

The company’s Accounting Department has prepared the following absorption costing income statements for July and August:

	July			August
Sales	$	550,000		$	950,000
Cost of goods sold		231,000			399,000
Gross margin		319,000			551,000
Selling and administrative expenses		199,000			223,000
Net operating income	$	120,000		$	328,000

Required:

1. Determine the unit product cost under:

a. Absorption costing.

b. Variable costing.

2. Prepare contribution format variable costing income statements for July and August.

3. Reconcile the variable costing and absorption costing net operating incomes.

Answer 1

Answer:-1)-a)-Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$4+$10+$2+$5 = $21 per unit

Explanation:- Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$75000/15000 units =$5 per unit

b)- )-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$4+$10+$2 = $16 per unit

2)-

Denton Company
Contribution Margin statement (Using variable costing approach) July month
Particulars			Amount
			$
Sales (a)	11000 units*$50 per unit		550000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufatured		240000
Direct materials	15000 units*$4 per unit	60000
Direct labor	15000 units*$10 per unit	150000
Variable manufacturing overhead	15000 units*$2 per unit	30000
Variable cost of goods available for sale		240000
Less:- Closing inventory	4000 units*$16 per unit	64000	176000
Gross contribution margin C= a-b			374000
Less:-Variable selling & administrative exp.	11000 units*$3 per unit		33000
Contribution margin			341000
Less:- Fixed costs
Manufacturing overhead			75000
Selling & administrative exp.			166000
Net Income			100000

Denton Company
Contribution Margin statement (Using variable costing approach) August month
Particulars			Amount
			$
Sales (a)	19000 units*$50 per unit		950000
Less:- Variable cost of goods sold (b)
Opening inventory		64000
Add:- Variable cost of goods manufatured		240000
Direct materials	15000 units*$4per unit	60000
Direct labor	15000 units*$10 per unit	150000
Variable manufacturing overhead	15000 units*$2 per unit	30000
Variable cost of goods available for sale		304000
Less:- Closing inventory		NIL	304000
Gross contribution margin C= a-b			646000
Less:-Variable selling & administrative exp.	19000 units*$3 per unit		57000
Contribution margin			589000
Less:- Fixed costs
Manufacturing overhead			75000
Selling & administrative exp.			166000
Net Income			348000

3)-

Reconcilation between net operating income under variable & absorption costing method
July Month
Particulars		Amount
		$
Net income under variable costing method		100000
Less:-Fixed manufacturing overheads brought in (opening inventories)	Nil	0
Add:-Fixed manufacturing overheads carried forword in(closing inventories)	4000 units*$5 per unit	20000
Net income under absorption costing method		120000

Reconcilation between net operating income under variable & absorption costing method
August Month
Particulars		Amount
		$
Net income under variable costing method		348000
Less:-Fixed manufacturing overheads brought in (opening inventories)	4000 units*$5 per unit	20000
Add:-Fixed manufacturing overheads carried forword in(closing inventories)	Nil	0
Net income under absorption costing method		328000