Question

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				3
Total variable cost per unit			$	21
Fixed costs per month:
Fixed manufacturing overhead	$	144,000
Fixed selling and administrative		160,000
Total fixed cost per month	$	304,000

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	24,000	20,000
August	24,000	28,000

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

	July			August
Sales	$	940,000		$	1,316,000
Cost of goods sold		480,000			672,000
Gross margin		460,000			644,000
Selling and administrative expenses		220,000			244,000
Net operating income	$	240,000		$	400,000

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.

Reconcile the variable costing and absorption costing net operating incomes. (Enter any losses or deductions as a negative value.):

	Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes July August Variable costing net operating income (loss) Add (deduct) fixed manufacturing overhead cost deferred in (released from) inventory under absorption costing Absorption costing net operating income (loss)

Answer 1

1) Unit Product Cost

D.M per Unit = $ 5

D.L per Unit = $11

V.M.O.H per Unit =$ 2

F.M.O.H = $144000

F.M.O.H per Unit = $144000 /24000 Unit =$ 6

V.S&A per Unit =$ 3

Fixed S&A = $ 160000

A) Product Cost Under Absorption Costing = Direct Material Cost Per Unit + Direct Labour Cost per Unit + Variable Manufacturing Overhead per Unit + Fixed  Manufacturing Overhead per Unit

Product Cost Under Absorption Costing = $5 + $11+ $2 + $6 = $24 per Unit

( In absorption costing Both Fixed and Variable Selling&admin Cost considered as Period Cost)

B) Product Cost Under Variable Costing = Direct Material Cost Per Unit + Direct Labour Cost per Unit + Variable Manufacturing Overhead per Unit

Product Cost Under Variable Costing =  $5 + $11+ $2 = $18

( In variable costing, Fixed Manufacturing overhead Cost and also Fixed and Variable selling&Admin Cost Considered as period Cost)

* Treatment of Fixed manufacturing overhead different for Absorption costing and Variable Costing

2) Variable Costing Income Statement

	July	Calculations	August	Calculations
Sales Revenue	$940,000	20000 *47	$1,316,000	28000 * 47
(-) Variable Cost	$420,000	Total V.C per Unit * Sales Unit 21*20000	$588,000	21*28000
Contribution Margin	$520,000		$728,000
(-) Fixed Cost	$304,000	total F.C for the Month	$ 304,000
Net operating Income	$216,000		$424000

3) Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes

	July	August
Net operating income under Variable Costing	$216000	$424000
Add : Fixed Manufacturing Overhead Cost deferred in Inventory (4000 Units * 6 )*	$24000
Less :Fixed Manufacturing Overhead Cost released from Inventory (4000 Units * 6 )*		($24000)
Net operating income under Absorption Costing	$ 240,000	$400000

In July Production = 24000 Unit and Sales was = 20000 Unit so 4000 Unit in Inventory, As we discussed earlier absorption costing treat Fixed manufacturing overhead as product cost. Here part of F.F.O.H allocated to inventory.

But In variable costing F.F.O.H treated as period cost