Question

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

Variable costs per unit:
Direct materials			$	6
Direct labor				9
Variable manufacturing overhead				4
Variable selling and administrative				3
Total variable cost per unit			$	22
Fixed costs per month:
Fixed manufacturing overhead	$	72,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	235,000

The product sells for $48 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	24,000	20,000
August	24,000	28,000

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

	July			August
Sales	$	960,000		$	1,344,000
Cost of goods sold		440,000			616,000
Gross margin		520,000			728,000
Selling and administrative expenses		223,000			247,000
Net operating income	$	297,000		$	481,000

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

Solution 1:

Computation of Unit Product cost - Denton Company
Particulars	Variable costing	Absorption Costing
Direct Material	$6	$6
Direct Labor	$9	$9
Variable manufacturing overhead	$4	$4
Fixed Manufacturing Overhead ($72000/24000)	$0	$3
Unit Product cost	$19	$22

Solution 2:

Denton Company
Income Statement - Variable Costing
Particulars	July	August
Sales	$9,60,000	$13,44,000
Variable Costs:
Variable cost of goods sold (units sold*$19)	$3,80,000	$5,32,000
Variable Selling and administrative expenses ($3*units sold)	$60,000	$84,000
Total Variable Costs	$4,40,000	$6,16,000
Contribution Margin	$5,20,000	$7,28,000
Fixed Expenses:
Fixed manufacturing overhead	$72,000	$72,000
Fixed Selling & Administrative Expenses	$1,63,000	$1,63,000
Net Operating Income	$2,85,000	$4,93,000

Solution 3:

Reconciliation of Net Operating income under absorption costing & Variable Costing
Particulars	July	August
Variable Costing Income (Loss)	$2,85,000	$4,93,000
Add : Fixed manufacturing overhead deferred in ending inventory ($3*4000)	$12,000	$0
Less: Fixed manufacturing overhead released in beginning inventory ($3*4000)	$0	$12,000
Absorption Costing Income (Loss)	$2,97,000	$4,81,000