Question

In: Accounting

Problem 7-22 Variable Costing Income Statements; Income Reconciliation [LO7-1, LO7-2, LO7-3] Denton Company manufactures and sells...

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 $ 4
Direct labor 12
Variable manufacturing overhead 3
Variable selling and administrative 3
Total variable cost per unit $ 22
Fixed costs per month:
Fixed manufacturing overhead $ 135,000
Fixed selling and administrative 175,000
Total fixed cost per month $ 310,000

The product sells for $45 per unit. Production and sales data for July and August, the first two months of operations, follow:

Units
Produced
Units
Sold
July 27,000 23,000
August 27,000 31,000

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

July August
Sales $ 1,035,000 $ 1,395,000
Cost of goods sold 552,000 744,000
Gross margin 483,000 651,000
Selling and administrative expenses 244,000 268,000
Net operating income $ 239,000 $ 383,000

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.

Solutions

Expert Solution

(1)

Unit Product Cost Absorption Variable
Direct Materials $                  4 $                  4
Direct Labor $                12 $                12
Variable Manufacturing Overhead $                  3 $                  3
Fixed Manufacturing Overhead
($135000/27000) $                  5
Unit Cost $                24 $                19

(2)

July August
Sales (@$45) $ 1,035,000 $ 1,395,000
Variable Expenses:
Variable Cost of goods sold (@$19) $     437,000 $     589,000
Variable selling & administrative expenses (@$3) $        69,000 $        93,000
Total Variable expenses $     506,000 $     682,000
Contribution Margin
Fixed Expenses:
Fixed Manufacturing overhead $     135,000 $     135,000
Fixed selling & administrative expenses $     175,000 $     175,000
Total Fixed expenses $     310,000 $     310,000
Net Operating Income (Loss) $     219,000 $     403,000

(3)

July August
Variable Costing Net Income (Loss) $     219,000 $     403,000
Add (Deduct) Fixed manufacturing overhead cost deferred in (released from) inventory $        20,000 $     (20,000)
Absorption Costing Net Income (Loss) $     239,000 $     383,000

Fixed cost per unit = $135000/27000 = $5

July = (27000 - 23000) * $5 = $20000

August = (23000 - 27000) * $5 = $20000


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