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				9
Variable manufacturing overhead				3
Variable selling and administrative				3
Total variable cost per unit			$	20
Fixed costs per month:
Fixed manufacturing overhead	$	105,000
Fixed selling and administrative		160,000
Total fixed cost per month	$	265,000

The product sells for $50 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	$	850,000		$	1,250,000
Cost of goods sold		374,000			550,000
Gross margin		476,000			700,000
Selling and administrative expenses		211,000			235,000
Net operating income	$	265,000		$	465,000
3. Reconcile the variable costing and absorption costing net operating incomes.

Answer 1

	Contribution income statement	July	August
	Sales	$8,50,000	$12,50,000
Less:	Variable expenses:
	Variable cost of goods sold(units sold*$17)	$2,89,000	$4,25,000
	Variable selling and admin expenses	$51,000	$75,000
	Total variable expenses	$3,40,000	$5,00,000
	Contribution Margin	$5,10,000	$7,50,000
Less:	Fixed Expenses:
	Fixed manufacturing overhead	$1,05,000	$1,05,000
	Fixed selling and admin expenses	$1,60,000	$1,60,000
	Total fixed expenses	$2,65,000	$2,65,000
	Net Income	$2,45,000	$4,85,000
	Reconciliation Statement	July	August
	Variable costing net operating income	$2,45,000	$4,85,000
Add/Deduct	Fixed manufacturing overhead cost deferred in (release from)	$20,000	-$20,000
	inventory under absorption costing(Note)
	Absorption costing net income	$2,65,000	$4,65,000
	Note:
		Year 1	Year 2
	Beginning Inventory units	0	4000
	Add:Units produced	21000	21000
	Less:Units sold	17000	25000
	Ending inventory	4000	0
	Deferement in July(4,000 units*$5)	$20,000
	Released in August(4,000 units*$5)		-$20,000
	Fixed manufacturing overhead per unit =$105,000 / 21,000 units =$5 per unit