Question

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

Variable costs per unit:
Direct materials			$	5
Direct labor				11
Variable manufacturing overhead				2
Variable selling and administrative				3
Total variable cost per unit			$	21
Fixed costs per month:
Fixed manufacturing overhead	$	126,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	289,000

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	21,000	17,000
August	21,000	25,000

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

	July			August
Sales	$	901,000		$	1,325,000
Cost of goods sold		408,000			600,000
Gross margin		493,000			725,000
Selling and administrative expenses		214,000			238,000
Net operating income	$	279,000		$	487,000

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)Determine the unit product cost under absorption costing and variable costing.
a)Variable costing
Variable costs per unit:
Direct materials	5
Direct labor	11
Variable manufacturing overhead	2
Total Variable Cost	18
b) Absorption costing
Variable costs per unit:
Direct materials	5
Direct labor	11
Variable manufacturing overhead	2
Fixed manufacturing overhead =$126000/21000	6
Total Absorption cost per unit	24
2)
Denton Company
Variable costing income statement
	July ($)	August ($)
Sales	901,000.	1,325,000.
Variable expenses:
Variable cost of goods sold (17,000 x $18),(25,000 x $18)	306,000.	450,000.
Variable Selling and administrative expense (@1)	51,000.	75,000.
Total variable expenses	357,000.	525,000.
Contribution margin	544,000.	800,000.
Fixed expense:
Fixed manufacturing overhead	126,000.	126,000.
Fixed Selling and administrative expense	163,000.	163,000.
Total fixed expenses	289,000.	289,000.
Net operating income	255,000.	511,000.
3)
	July ($)	August ($)
Variable costing net operating income	255,000	511,000
Add/(Deduct): Fixed manufacturing overhead cost deffered in (released from) inventory under absorption costing ($6 * 4,000)	24,000	-24,000
Absorption costing net operating income	279,000	487,000