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				10
Variable manufacturing overhead				3
Variable selling and administrative				1
Total variable cost per unit			$	19
Fixed costs per month:
Fixed manufacturing overhead	$	105,000
Fixed selling and administrative		172,000
Total fixed cost per month	$	277,000

The product sells for $54 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	$	918,000		$	1,350,000
Cost of goods sold		391,000			575,000
Gross margin		527,000			775,000
Selling and administrative expenses		189,000			197,000
Net operating income	$	338,000		$	578,000

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	Unit Product cost under
a	Absorption costing
	Direct Material	$5
	Direct labor	$10
	Variable manufacturing overhead	$3
	Fixed manufacturing overhead (105000/21000)	$5
	Unit product cost	$23
	Fixed manufacturing overhead per unit = fixed manufacturing overhead/units produced
b	Variable costing
	Direct Material	$5
	Direct labor	$10
	Variable manufacturing overhead	$3
	Unit product cost	$18
2	Contribution format variable costing income statement for July and August.
		July	August
	Sales	$918,000	$1,350,000
	Less: Variable cost of goods sold	306000	450000
	Variable selling and administrative expenses	$17,000	$25,000
	Contribution Margin	$595,000	$875,000
	Fixed Manufacturing overhead	$105,000	$105,000
	Fixed Selling and administrative expenses	$172,000	$172,000
	Net Operating Income	$318,000	$598,000
3	Reconciliation of variable costing and absorption costing net operating incomes
		July	August
	Net operating income under absorption costing	$338,000	$578,000
	Less: Fixed manufacturing overhead carried forward	$20,000
	(4000 x $5) (closing inventory)
	Add: Fixed manufacturing overhead brought in		$20,000
	(4000 x $5) (opening inventory)
	Net operating income under variable costing	$318,000	$598,000