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				10
Variable manufacturing overhead				2
Variable selling and administrative				3
Total variable cost per unit			$	20
Fixed costs per month:
Fixed manufacturing overhead	$	90,000
Fixed selling and administrative		166,000
Total fixed cost per month	$	256,000

The product sells for $47 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	$	658,000		$	1,034,000
Cost of goods sold		308,000			484,000
Gross margin		350,000			550,000
Selling and administrative expenses		208,000			232,000
Net operating income	$	142,000		$	318,000

Required:

1. Determine the unit product cost under:

a. Absorption costing.

b. Variable costing.

2. Prepare contribution format 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				10
Variable Manufacturing overheads				2
Fixed Manufacturing overheads				5.00
Absorption costing unit prroduct cost				22.00
Compute the Variable costing Unit Product cost
Direct Material				5
Direct labour				10
Variable Manufacturing overheads				2
Variable costing unit prroduct cost				17
Construct The Variable Costing Income Statement under FIFO
				JULY		AUGUST
Sales					658,000		1,034,000
Less: Variable cost
variable cost of goods sold				238,000		374,000
Variable selling expense				42,000	280,000	66,000	440,000
Contribution margin					378,000		594,000
Fixed expense:
Fixed Manufacturing overheads					90,000		90,000
Fixed selling expense					166,000		166,000
Net operating Income					122,000		338,000
Reconcilitaion Statement:
July
Net Income as per Vvarriable costing:				122000
Add: Fixed OH deferred (4000 units @5)				20000
Net Income as per absorption costing				142000
Aug:
Net Income as per Vvarriable costing:				338000
Less: Fixed OH released (4000 units @5)				20000
Net Income as per absorption costing				318000