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			$	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.

Answer 1

(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