Question

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

Variable costs per unit:
Direct materials			$	6
Direct labor				10
Variable manufacturing overhead				2
Variable selling and administrative				3
Total variable cost per unit			$	21
Fixed costs per month:
Fixed manufacturing overhead	$	90,000
Fixed selling and administrative		172,000
Total fixed cost per month	$	262,000

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	30,000	26,000
August	30,000	34,000

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

	July			August
Sales	$	1,352,000		$	1,768,000
Cost of goods sold		546,000			714,000
Gross margin		806,000			1,054,000
Selling and administrative expenses		250,000			274,000
Net operating income	$	556,000		$	780,000

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