Question

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

Variable costs per unit:
Direct materials			$	4
Direct labor				10
Variable manufacturing overhead				3
Variable selling and administrative				1
Total variable cost per unit			$	18
Fixed costs per month:
Fixed manufacturing overhead	$	120,000
Fixed selling and administrative		175,000
Total fixed cost per month	$	295,000

The product sells for $50 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	$	1,300,000		$	1,700,000
Cost of goods sold		546,000			714,000
Gross margin		754,000			986,000
Selling and administrative expenses		201,000			209,000
Net operating income	$	553,000		$	777,000

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

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