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				12
Variable manufacturing overhead				4
Variable selling and administrative				2
Total variable cost per unit			$	23
Fixed costs per month:
Fixed manufacturing overhead	$	75,000
Fixed selling and administrative		172,000
Total fixed cost per month	$	247,000

The product sells for $53 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	15,000	11,000
August	15,000	19,000

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

	July			August
Sales	$	583,000		$	1,007,000
Cost of goods sold		286,000			494,000
Gross margin		297,000			513,000
Selling and administrative expenses		194,000			210,000
Net operating income	$	103,000		$	303,000

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

1a)	unit product cost
					under	under
					Absorption	Variable
					costing	costing
	Direct materials				5	5
	Direct labor				12	12
	variable manufacturing overhead				4	4
	fixed manufacturing oh (75000/15000)				5
	unit product cost				26	21
	Absorption costing			26
	Variable costing			21
2)	contribution income statement
					july	august
	Sales				583,000	1,007,000
	less Variable expense
	variable cost of goods sold				231000	399000
	variable Selling and administrative				22,000	38,000
	Contribution margin				330000	570,000
	Fixed expense
	fixed manufacturing overhead				75,000	75,000
	fixed selling & administrative				172,000	172,000
	net income				83,000	323,000
3)	Reconciliation					july	august
	net operating income under variable costing					83,000	323,000
	fixed overhead deferred in ending inventory					20,000
	fixed overhead released in opening inventory						-20,000
	net operating income under absorption costing					103,000	303,000