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				12
Variable manufacturing overhead				2
Variable selling and administrative				1
Total variable cost per unit			$	20
Fixed costs per month:
Fixed manufacturing overhead	$	72,000
Fixed selling and administrative		160,000
Total fixed cost per month	$	232,000

The product sells for $46 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	$	644,000		$	1,012,000
Cost of goods sold		322,000			506,000
Gross margin		322,000			506,000
Selling and administrative expenses		174,000			182,000
Net operating income	$	148,000		$	324,000

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