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				11
Variable manufacturing overhead				3
Variable selling and administrative				2
Total variable cost per unit			$	19
Fixed costs per month:
Fixed manufacturing overhead	$	150,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	313,000

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	30,000	26,000
August	30,000	34,000

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

	July			August
Sales	$	1,404,000		$	1,836,000
Cost of goods sold		572,000			748,000
Gross margin		832,000			1,088,000
Selling and administrative expenses		215,000			231,000
Net operating income	$	617,000		$	857,000

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.

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

	Unit Product Cost a. Absorption costing b. Variable costing

Prepare contribution format variable costing income statements for July and August.

	Denton Company Variable Costing Income Statement July August Net operating income (loss)

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

1
	Absorption costing	Variable costing
Direct materials	3	3
Direct labor	11	11
Variable manufacturing overhead	3	3
Fixed manufacturing overhead	5	0
Unit product cost	22	17
2
	July	August
Sales	1404000	1836000
Variable expenses:
Variable cost of goods sold @ $16 per unit	442000	578000
Variable selling and administrative expenses @ $2 per unit	52000	68000
Total Variable expenses	494000	646000
Contribution margin	910000	1190000
Fixed expenses:
Fixed manufacturing overhead	150000	150000
Fixed selling and administrative expenses	163000	163000
Total Fixed expenses	313000	313000
Net Operating income	597000	877000
3
Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	July	August
Variable costing net operating income (loss)	597000	877000
Add (deduct) fixed manufacturing overhead cost deferred in (released from) inventory under absorption costing	20000	-20000
Absorption costing net operating income (loss)	617000	857000