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				9
Variable manufacturing overhead				4
Variable selling and administrative				1
Total variable cost per unit			$	17
Fixed costs per month:
Fixed manufacturing overhead	$	108,000
Fixed selling and administrative		166,000
Total fixed cost per month	$	274,000

The product sells for $53 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	27,000	23,000
August	27,000	31,000

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

	July			August
Sales	$	1,219,000		$	1,643,000
Cost of goods sold		460,000			620,000
Gross margin		759,000			1,023,000
Selling and administrative expenses		189,000			197,000
Net operating income	$	570,000		$	826,000

1 Determine the unit product cost under: (a) Absorption costing, (b) Variable costing.

	Unit Product Cost a. Absorption costing b. Variable costing

3 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

1a)	unit product cost
					under	under
					Absorption	Variable
					costing	costing
	Direct materials				3	3
	Direct labor				9	9
	variable manufacturing overhead				4	4
	fixed manufacturing oh (108000/27000)				4
	unit product cost				20	16
	Absorption costing			20
	Variable costing			16
2)	contribution income statement
					july	august
	Sales				1,219,000	1,643,000
	less Variable expense
	variable cost of goods sold				368000	496000
	variable Selling and administrative				23,000	31,000
	Contribution margin				828000	1,116,000
	Fixed expense
	fixed manufacturing overhead				108,000	108,000
	fixed selling & administrative				166,000	166,000
	net income				554,000	842,000
3)	Reconciliation					july	august
	net operating income under variable costing					554,000	842,000
	fixed overhead deferred in ending inventory					16,000
	fixed overhead released in opening inventory						-16,000
	net operating income under absorption costing					570,000	826,000