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				3
Variable selling and administrative				2
Total variable cost per unit			$	19
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 $51 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	$	714,000		$	1,122,000
Cost of goods sold		294,000			462,000
Gross margin		420,000			660,000
Selling and administrative expenses		191,000			207,000
Net operating income	$	229,000		$	453,000

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