Question

Denton Company manufactures and sells a single product. Cost data for the product are given:

Variable costs per unit:
Direct materials			$	3
Direct labor				10
Variable manufacturing overhead				4
Variable selling and administrative				2
Total variable cost per unit			$	19
Fixed costs per month:
Fixed manufacturing overhead	$	126,000
Fixed selling and administrative		160,000
Total fixed cost per month	$	286,000

The product sells for $50 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	21,000	17,000
August	21,000	25,000

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

	July			August
Sales	$	850,000		$	1,250,000
Cost of goods sold		391,000			575,000
Gross margin		459,000			675,000
Selling and administrative expenses		194,000			210,000
Net operating income	$	265,000		$	465,000

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

the unit product cost under:

a. Absorption costing.

Direct materials	3
Direct labor	10
Variable manufacturing overhead	4
Fixed manufacturing overhead (126000/21000)	6
unit product cost under absorption costing	23

the unit product cost under:

b. Variable costing.

Direct materials	3
Direct labor	10
Variable manufacturing overhead	4
unit product cost under Variable costing	17

2.

Prepare contribution format variable costing income statements for July and August.

	July	August
Sales	850,000	1,250,000
Less: variable expanses
variable cost of goods sold	289000	425000
variable Selling and admin expanses	34000	50000
Total Variable cost	323000	475000
Cotribution margin	527,000	775,000
Less: Fixed cost
Fixed manufacturing overhead	126000	126000
Fixed selling and administrative	160,000	160,000
Total Fixed cost	286,000	286,000
Operating incmoe / (loss)	241,000	489,000

3

Reconcile the variable costing and absorption costing net operating incomes.

	July	August
Variable costing net operating income	241,000	489,000
Add: Fixed manufacturing overhead cost deferred in inventory under absorption Costing (4000*6)	24000
Less: Fixed manufacturing overhead cost Releases in inventory under absorption Costing		-24000
Absorption costing net operating income	265,000	465,000