Question

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

1. Unit Product Cost under
   1. Absorption Costing = Direct Materials + Direct Labor + Variable Manufacturing overhead = 7+10+5+(315,000/17,500) = $ 40
   2. Variable Cost = Direct Material+Direct Labor +Variable manufacturing overhead = 7+10+5 = $ 22

2. Income Statement Under Variable Costing ($)

   	Year 1	Year 2
   Sales	900,000	1200,000
   Less: variable costs
   Direct Materials	105,000	140,000
   Direct Labor	150,000	200,000
   Variable manufacturing overhead	75,000	100,000
   Variable selling overhead	45,000	60,000
   Contribution	525,000	700,000
   Less: Fixed Costs
   Fixed manufacturing overhead	315,000	315,000
   Fixed selling overhead	245,000	245,000
   Net Income	-35,000	140,000

3.