Question

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

Variable costs per unit:
Direct materials			$	3
Direct labor				10
Variable manufacturing overhead				3
Variable selling and administrative				1
Total variable cost per unit			$	17
Fixed costs per month:
Fixed manufacturing overhead	$	63,000
Fixed selling and administrative		160,000
Total fixed cost per month	$	223,000

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	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	$	782,000		$	1,150,000
Cost of goods sold		323,000			475,000
Gross margin		459,000			675,000
Selling and administrative expenses		177,000			185,000
Net operating income	$	282,000		$	490,000

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

SOLUTION

(A)

	Absorption costing ($)	Variable costing ($)
Direct materials	3	3
Direct Labor	10	10
Variable manufacturing overhead	3	3
Fixed manufacturing overhead ($63,000/21,000)	3	-
Unit product cost	19	16

(B)

Denton company

Variable costing Income statement

	July ($)	August ($)
Sales	782,000	1,150,000
Variable expenses:
Variable cost of goods sold (17,000*$16),(25,000*$16)	272,000	400,000
Variable Selling and administrative expense (@1)	17,000	25,000
Total variable expenses	289,000	425,000
Contribution margin	493,000	725,000
Fixed expense:
Fixed manufacturing overhead	63,000	63,000
Fixed Selling and administrative expense	160,000	160,000
Total fixed expenses	223,000	223,000
Net operating income	270,000	502,000

(C)

	July ($)	August ($)
Variable costing net operating income	270,000	502,000
Add/(Deduct): Fixed manufacturing overhead cost deffered in (released from) inventory under absorption costing ($3 * 4,000)	12,000	(12,000)
Absorption costing net operating income	282,000	490,000