Question

Problem 6-22 (Static) Variable Costing Income Statements; Income Reconciliation [LO6-1, LO6-2, LO6-3]

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

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Denton
Workings for Answer 1 a	July	August	Note
Fixed manufacturing overhead	315,000.00	315,000.00	A
Units produced	17,500.00	17,500.00	B
Fixed manufacturing overhead per unit	18.00	18.00	C=A/B
Answer 1 a	Amount $	Note
Direct materials	7.00
Direct labor	10.00
Variable manufacturing overhead	5.00
Variable manufacturing costs per unit	22.00	See c
Add: Fixed manufacturing overhead per unit	18.00
Product cost per unit	40.00
Answer 1 b	Amount $
Direct materials	7.00
Direct labor	10.00
Variable manufacturing overhead	5.00
Product cost per unit	22.00	D
Workings for answer 2	July	August	Note
Units sold	15,000.00	20,000.00	G
Cost of goods sold	330,000.00	440,000.00	I=G*D
Variable selling and administrative per unit	3.00	3.00	L
Variable selling and administrative	45,000.00	60,000.00	M=L*G
Answer 2
Variable costing income statement	July	August
Sales	900,000.00	1,200,000.00
Less: Variable costs
Variable costs of goods sold	330,000.00	440,000.00	See I
Selling commission	45,000.00	60,000.00	See M
Total Variable costs	375,000.00	500,000.00
Contribution margin	525,000.00	700,000.00
Less: Fixed costs
Fixed manufacturing overhead	315,000.00	315,000.00
Fixed selling and administrative	245,000.00	245,000.00
Total Fixed costs	560,000.00	560,000.00
Operating Income	(35,000.00)	140,000.00
Workings for Reconciliation	July	August	Note
Fixed manufacturing cost allocation rate	18.00	18.00	See C
Ending Inventory	2,500.00	-	N
Cost of Fixed manufacturing overhead in ending Inventory	45,000.00	-	O=C*N
Opening Inventory	-	2,500.00	P
Cost of Fixed manufacturing overhead in Opening Inventory	-	45,000.00	Q=C*P
Answer 3- Reconciliation	July	August
Operating Income- Variable costing	(35,000.00)	140,000.00
Add: Deferred cost of Fixed manufacturing overhead in ending Inventory	45,000.00	-	See O
Less: Deferred cost of Fixed manufacturing overhead in Opening Inventory	-	(45,000.00)	See Q
Operating Income- Absorption costing	10,000.00	95,000.00
Hence reconciled.