Question

Cost data for the single product-line company are as follows:

Variable costs per unit:
Direct materials			$	4
Direct labor				9
Variable manufacturing overhead				3
Variable selling and administrative				1
Total variable cost per unit			$	17
Fixed costs per month:
Fixed manufacturing overhead	$	135,000
Fixed selling and administrative		169,000
Total fixed cost per month	$	304,000

The product sells for $50 per unit. Production and sales data for the following two months are as follows:

	Units Produced	Units Sold
July	27,000	23,000
August	27,000	31,000

Absorption costing income statements were prepared by Deenton's Controller for the same two months as follows:

	July			August
Sales	$	1,150,000		$	1,550,000
Cost of goods sold		483,000			651,000
Gross margin		667,000			899,000
Selling and administrative expenses		192,000			200,000
Net operating income	$	475,000		$	699,000

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 :

(a) Absorption Costing :

(a) Direct Material	$ 4
(b) Direct Labor	$ 9
(c) Variable Manufacturing OH	$ 3
(d) Fixed Manufacturing OH ($ 135,000 / 27,000)	$ 5
(e) Unit Product Cost (a + b + c + d)	$ 21

(b) Variable Costing :

(a) Direct Material	$ 4
(b) Direct Labor	$ 9
(c) Variable Manufacturing OH	$ 3
(d) Unit Product Cost (a + b + c)	$ 16

(2) Income under Variable Costing :

	July	Aug
Sales	$ 1,150,000	$ 1,550,000
Less : Variable Costs
Direct Material (Units Sold * $ 4)	$ 92,000	$ 124,000
Direct Labor (Units Sold * $ 9)	$ 207,000	$ 279,000
Variable OH (Units Sold * $ 3)	$ 69,000	$ 93,000
Variable Selling and Admin Expenses (Units Sold * $ 1)	$ 23,000	$ 31,000
Total Variable Costs	$ 391,000	$ 527,000
Contribution Margin	$ 759,000	$ 1,023,000
Less : Fixed Expenses
Fixed Manufacturing OH	$ 135,000	$ 135,000
Fixed Selling and Administrative Expenses	$ 169,000	$ 169,000
Total Fixed Expenses	$ 304,000	$ 304,000
Net Income (loss)	$ 455,000	$ 719,000

(3) Reconciliation

	Jul	Aug
Variable Costing Income (loss)	$ 455,000	$ 719,000
Add : Fixed OH in ending Inventory (4,000 * $ 5)	$ 20,000
Less : Fixed OH in Opening Inventory		($ 20,000)
Absorption Costing Income (loss)	$ 475,000	$ 699,000

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