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				9
Variable manufacturing overhead				3
Variable selling and administrative				2
Total variable cost per unit			$	19
Fixed costs per month:
Fixed manufacturing overhead	$	54,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	217,000

The product sells for $54 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	18,000	14,000
August	18,000	22,000

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

	July			August
Sales	$	756,000		$	1,188,000
Cost of goods sold		280,000			440,000
Gross margin		476,000			748,000
Selling and administrative expenses		191,000			207,000
Net operating income	$	285,000		$	541,000

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.

Determine the unit product cost under: (a) Absorption costing, (b) Variable costing.

	Unit Product Cost a. Absorption costing b. Variable costing

Prepare variable costing income statements for July and August.

	Denton Company Variable Costing Income Statement July August Net operating income (loss)

Reconcile the variable costing and absorption costing net operating incomes. (Enter any losses or deductions as a negative value.)

	Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes July August Variable costing net operating income (loss)    Add (deduct) fixed manufacturing overhead cost deferred in (released from) inventory under absorption costing Absorption costing net operating income (loss)

Answer 1

1a
Direct materials	5
Direct labor	9
Variable manufacturing overhead	3
Fixed manufacturing overhead	3	=54000/18000
Absorption costing unit product cost	20
1b
Direct materials	5
Direct labor	9
Variable manufacturing overhead	3
Variable costing unit product cost	17
2
	July	August
Sales	756000	1188000
Variable expenses:
Variable cost of goods sold	238000	374000
Variable selling and administrative expenses	28000	44000
Total Variable expenses	266000	418000
Contribution margin	490000	770000
Fixed expenses:
Fixed manufacturing overhead	54000	54000
Fixed selling and administrative expenses	163000	163000
Total Fixed expenses	217000	217000
Net operating income(loss)	273000	553000
3
	July	August
Variable costing net operating income	273000	553000
Add(deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	12000	(12000)	=4000*3
Absorption costing net operating income	285000	541000
Workings:
	July	August
Sales	=14000*54	=22000*54
Variable expenses:
Variable cost of goods sold	=14000*17	=22000*17
Variable selling and administrative expenses	=14000*2	=22000*2