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

1a
Direct materials	7
Direct labor	10
Variable manufacturing overhead	5
Fixed manufacturing overhead	18	=315000/17500
Absorption costing unit product cost	40
1b
Direct materials	7
Direct labor	10
Variable manufacturing overhead	5
Variable costing unit product cost	22
2
	July	August
Sales	900000	1200000
Variable expenses:
Variable cost of goods sold	330000	440000
Variable selling and administrative expenses	45000	60000
Total Variable expenses	375000	500000
Contribution margin	525000	700000
Fixed expenses:
Fixed manufacturing overhead	315000	315000
Fixed selling and administrative expenses	245000	245000
Total Fixed expenses	560000	560000
Net operating income(loss)	(35000)	140000
3
	July	August
Variable costing net operating income	(35000)	140000
Add(deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	45000	(45000)	=2500*18
Absorption costing net operating income	10000	95000

Workings:
	July	August
Variable expenses:
Variable cost of goods sold	=15000*22	=20000*22
Variable selling and administrative expenses	=15000*3	=20000*3