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				12
Variable manufacturing overhead				4
Variable selling and administrative				3
Total variable cost per unit			$	24
Fixed costs per month:
Fixed manufacturing overhead	$	96,000
Fixed selling and administrative		160,000
Total fixed cost per month	$	256,000

The product sells for $54 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	$	1,080,000		$	1,512,000
Cost of goods sold		500,000			700,000
Gross margin		580,000			812,000
Selling and administrative expenses		220,000			244,000
Net operating income	$	360,000		$	568,000

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

1.

Unit product cost:

Absorption costing:
Direct material	$5
Direct labor	12
Variable manufacturing overhead	4
Fixed manufacturing overhead ($96,000/24,000)	4
Unit product cost	$25
Variable costing:
Direct material	$5
Direct labor	12
Variable manufacturing overhead	4
Unit product cost	$21

2.

DENTON COMPANY Variable Costing Income Statement For The Months July and August
	July	August
Sales	$1,080,000 (20,000*$54)	$1,512,000 (28,000*$54)
Variable expenses:
Variable cost of goods sold	420,000 (20,000*$21)	588,000 (28,000*$21)
Variable selling and administrative	60,000 (20,000*$3)	84,000 (28,000*$3)
Total variable expenses	480,000	672,000
Contribution margin	600,000	840,000
Fixed expenses:
Fixed manufacturing overhead	96,000	96,000
Fixed selling and administrative	160,000	160,000
Total fixed expenses	256,000	256,000
Net operating income	$344,000	$584,000

3.

	July	August
Variable costing net operating income	$344,000	$584,000
Add: Fixed manufacturing overhead deferred in inventory	16,000 (4,000*$4)
Less: Fixed manufacturing overhead released from inventory		-16,000
Absorption costing net operating income	$360,000	$568,000