Question

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

Variable costs per unit:
Direct materials			$	7
Direct labor				10
Variable manufacturing overhead				5
Variable selling and administrative				3
Total variable cost per unit			$	25
Fixed costs per month:
Fixed manufacturing overhead	$	315,000
Fixed selling and administrative		245,000
Total fixed cost per month	$	560,000

The product sells for $60 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	17,500	15,000
August	17,500	20,000

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

	July			August
Sales	$	900,000		$	1,200,000
Cost of goods sold		600,000			800,000
Gross margin		300,000			400,000
Selling and administrative expenses		290,000			305,000
Net operating income	$	10,000		$	95,000

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

1. The unit product cost under

a. Absorption costing

Fixed manufacturing overhead per unit = Total manufacturing overhead / Units produced

= #315,000 / 17,500

= $18

Unit product cost = Direct material + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

= $7 + $10 + $5 + $18

= $40

b. Variable costing

Unit product cost = Direct material + Direct labor ++ Variable manufacturing overhead

= $7 + $10 + $5

= $22

2. The preparation of variable costing income statements for July and August is shown below:-

For July month

The following formula is to be used:

Hence, the net loss under variable costing is -$35,000

For the August month

The following formula should be used

Hence, the net income under variable costing is $140,000

3.

The reconciliation for July month is as follows

The calculation is shown below:

For August month

The calculation is as follows: