Question

Problem 7-22 Variable Costing Income Statements; Income Reconciliation [LO7-1, LO7-2, LO7-3]

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

Variable costs per unit:
Direct materials			$	5
Direct labor				11
Variable manufacturing overhead				2
Variable selling and administrative				2
Total variable cost per unit			$	20
Fixed costs per month:
Fixed manufacturing overhead	$	90,000
Fixed selling and administrative		160,000
Total fixed cost per month	$	250,000

The product sells for $47 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	18,000	14,000
August	18,000	22,000

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

	July			August
Sales	$	658,000		$	1,034,000
Cost of goods sold		322,000			506,000
Gross margin		336,000			528,000
Selling and administrative expenses		188,000			204,000
Net operating income	$	148,000		$	324,000

Required:

1. Determine the unit product cost under:

a. Absorption costing.

b. Variable costing.

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

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

Answer 1

1a)	unit product cost
					under	under
					Absorption	Variable
					costing	costing
	Direct materials				5	5
	Direct labor				11	11
	variable manufacturing overhead				2	2
	fixed manufacturing oh (90000/18000)				5
	unit product cost				23	18
	Absorption costing			23
	Variable costing			18
2)	contribution income statement
					july	august
	Sales				658,000	1,034,000
	less Variable expense
	variable cost of goods sold				252000	396000
	variable Selling and administrative				28,000	44,000
	Contribution margin				378000	594,000
	Fixed expense
	fixed manufacturing overhead				90,000	90,000
	fixed selling & administrative				160,000	160,000
	net income				128,000	344,000
3)	Reconciliation					july	august
	net operating income under variable costing					128,000	344,000
	fixed overhead deferred in ending inventory					20,000
	fixed overhead released in opening inventory						-20,000
	net operating income under absorption costing					148,000	324,000