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				11
Variable manufacturing overhead				3
Variable selling and administrative				3
Total variable cost per unit			$	23
Fixed costs per month:
Fixed manufacturing overhead	$	96,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	259,000

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	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	$	1,000,000		$	1,400,000
Cost of goods sold		480,000			672,000
Gross margin		520,000			728,000
Selling and administrative expenses		223,000			247,000
Net operating income	$	297,000		$	481,000

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