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				10
Variable manufacturing overhead				3
Variable selling and administrative				1
Total variable cost per unit			$	18
Fixed costs per month:
Fixed manufacturing overhead	$	63,000
Fixed selling and administrative		169,000
Total fixed cost per month	$	232,000

The product sells for $46 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	21,000	17,000
August	21,000	25,000

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

	July			August
Sales	$	782,000		$	1,150,000
Cost of goods sold		340,000			500,000
Gross margin		442,000			650,000
Selling and administrative expenses		186,000			194,000
Net operating income	$	256,000		$	456,000

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

1a)	unit product cost
					under	under
					Absorption	Variable
					costing	costing
	Direct materials				4	4
	Direct labor				10	10
	variable manufacturing overhead				3	3
	fixed manufacturing oh (63000/21000)				3
	unit product cost				20	17
	Absorption costing			20
	Variable costing			17
2)	contribution income statement
					july	august
	Sales				782,000	1,150,000
	less Variable expense
	variable cost of goods sold				289000	425000
	variable Selling and administrative				17,000	25,000
	Contribution margin				476000	700,000
	Fixed expense
	fixed manufacturing overhead				63,000	63,000
	fixed selling & administrative				169,000	169,000
	net income				244,000	468,000
3)	Reconciliation					july	august
	net operating income under variable costing					244,000	468,000
	fixed overhead deferred in ending inventory					12,000
	fixed overhead released in opening inventory						-12,000
	net operating income under absorption costing					256,000	456,000