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				11
Variable manufacturing overhead				4
Variable selling and administrative				2
Total variable cost per unit			$	21
Fixed costs per month:
Fixed manufacturing overhead	$	90,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	253,000

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		336,000			528,000
Gross margin		322,000			506,000
Selling and administrative expenses		191,000			207,000
Net operating income	$	131,000		$	299,000

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

1
	Absorption	Variable
Direct materials	4	4
Direct labor	11	11
Variable manufacturing overhead	4	4
Fixed manufacturing overhead	5	0
Unit product cost	24	19
a. Absorption costing unit product cost = $24
b. Variable costing unit product cost = $19
2
	July	August
Sales	658000	1034000
Variable expenses:
Variable cost of goods sold	266000	418000
Variable selling and administrative expenses	28000	44000
Total Variable expenses	294000	462000
Contribution margin	364000	572000
Fixed expenses:
Fixed manufacturing overhead	90000	90000
Fixed selling and administrative expenses	163000	163000
Total Fixed expenses	253000	253000
Net operating income(loss)	111000	319000
3
	July	August
Variable costing net income	111000	319000
Add(deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	20000	(20000)
Absorption costing net operating income	131000	299000