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				11
Variable manufacturing overhead				2
Variable selling and administrative				2
Total variable cost per unit			$	20
Fixed costs per month:
Fixed manufacturing overhead	$	54,000
Fixed selling and administrative		166,000
Total fixed cost per month	$	220,000

The product sells for $49 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	$	686,000		$	1,078,000
Cost of goods sold		294,000			462,000
Gross margin		392,000			616,000
Selling and administrative expenses		194,000			210,000
Net operating income	$	198,000		$	406,000

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

Construct The Absorption Costing Unit Product Cost
Direct Material			5
Direct labour			11
Variable Manufacturing overheads	2
Fixed Manufacturing overheads		3.00	(54000/18000)
Absorption costing unit prroduct cost	21.00
Compute the Variable costing Unit Product cost
Direct Material			5
Direct labour			11
Variable Manufacturing overheads	2
Variable costing unit prroduct cost	18
Construct The Variable Costing Income Statement under FIFO
				July	Aug
Sales				6,86,000	10,78,000
Less: Variable cost
variable cost of goods sold		252000	396000
Variable selling expense		28,000	44,000
Total Variable cost			2,80,000	4,40,000
Contribution margin			4,06,000	6,38,000
Fixed expense:
Fixed Manufacturing overheads	54,000	54,000
Fixed selling expense		1,66,000	1,66,000
Total Fixed cost			2,20,000	2,20,000
Net operating Income		1,86,000	4,18,000
Reconciliation Statement
				July	Aug
Net income as per Variable costing	186000	418000
Add: Fixed Mfg oh deferrred		12000
Less: Fixed Mfg oh released			12000
Net Income as per Absorption		198000	406000