Question

Denton Company manufactures and sells a single product. Cost data for the product are given:

Variable costs per unit:
Direct materials			$	4
Direct labor				11
Variable manufacturing overhead				4
Variable selling and administrative				2
Total variable cost per unit			$	21
Fixed costs per month:
Fixed manufacturing overhead	$	120,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	283,000

The product sells for $52 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	24,000	20,000
August	24,000	28,000

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

	July			August
Sales	$	1,040,000		$	1,456,000
Cost of goods sold		480,000			672,000
Gross margin		560,000			784,000
Selling and administrative expenses		203,000			219,000
Net operating income	$	357,000		$	565,000

Required:

1. Determine the unit product cost under:

a. Absorption costing.

b. Variable costing.

2. Prepare variable costing income statements for July and August

Denton Company Variable Costing Income Statement July August Sales $1,040,000 $1,456,000 Variable expenses: Variable cost of goods sold 480,000 672,000 Variable selling and administrative expenses Total variable expenses 480,000 672,000 Contribution margin 560,000 784,000 Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative expenses Total fixed expenses 0 0 Net operating income (loss) $560,000 $784,000

3. 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