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				4
Variable selling and administrative				2
Total variable cost per unit			$	20
Fixed costs per month:
Fixed manufacturing overhead	$	108,000
Fixed selling and administrative		160,000
Total fixed cost per month	$	268,000

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	18,000	14,000
August	18,000	22,000

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

	July			August
Sales	$	644,000		$	1,012,000
Cost of goods sold		336,000			528,000
Gross margin		308,000			484,000
Selling and administrative expenses		188,000			204,000
Net operating income	$	120,000		$	280,000

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