Question

Problem 6-22 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			$	4
Direct labor				11
Variable manufacturing overhead				2
Variable selling and administrative				1
Total variable cost per unit			$	18
Fixed costs per month:
Fixed manufacturing overhead	$	108,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	271,000

The product sells for $49 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	$	1,127,000		$	1,519,000
Cost of goods sold		483,000			651,000
Gross margin		644,000			868,000
Selling and administrative expenses		186,000			194,000
Net operating income	$	458,000		$	674,000

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.

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

	Unit Product Cost a. Absorption costing $21 b. Variable costing $17

Prepare variable costing income statements for July and August.

	Denton Company Variable Costing Income Statement July August Sales Variable expenses: Variable cost of goods sold Variable selling and administrative expenses Total variable expenses 0 0 Contribution margin 0 0 Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative expenses Total fixed expenses 0 0 Net operating income (loss) $0 $

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

Particulars	Amount (in $ )
Direct materials	$4
Direct labor	$11
Variable manufacturing overhead	$2
Fixed manufacturing overhead ($108,000 / 27,000 units)	$4
Unit product cost under Absorption costing	$21 per unit
Particulars	Amount (in $ )
Direct materials	$4
Direct labor	$11
Variable manufacturing overhead	$2
Unit product cost under variable costing	$17 per unit

Variable Costing Income Statement
	July	August
Sales	$ 1,127,000	$ 1,519,000
Variable expenses:
Variable cost of goods sold	($391,000) (23,000 x $17)	($527,000) (31,000 x $17)
Variable selling and administrative expenses	($23,000) (23,000 x $1)	($31,000) (31,000 x $1)
Total variable expenses	($414,000)	($558,000)
Contribution margin	$713,000	$961,000
Fixed expenses:
Fixed manufacturing overhead	($108,000)	($108,000)
Fixed selling and administrative expenses	($163,000)	($163,000)
Total fixed expenses	($271,000)	($271,000)
Net operating income (loss)	$442,000	$690,000
3)
Reconciliation of Variable Costing and Absorption Costing
	July	August
Variable costing net operating income (loss)	$442,000	$690,000
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under Absorption costing (Fixed manufacturing overhead x Diffence in Produced and Sold units)	$16,000 (4,000 x $4)	($16,000) (4,000 x $4)
Absorption costing net operating income (loss)	$458,000	$674,000