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				4
Variable selling and administrative				1
Total variable cost per unit			$	18
Fixed costs per month:
Fixed manufacturing overhead	$	135,000
Fixed selling and administrative		169,000
Total fixed cost per month	$	304,000

The product sells for $47 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	27,000	23,000
August	27,000	31,000

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

	July			August
Sales	$	1,081,000		$	1,457,000
Cost of goods sold		506,000			682,000
Gross margin		575,000			775,000
Selling and administrative expenses		192,000			200,000
Net operating income	$	383,000		$	575,000

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.

Denton Company Variable Costing Income Statement July August Sales $1,081,000 $1,457,000 Variable expenses: Beginning merchandise inventory Variable selling and administrative expenses Ending merchandise inventory Variable cost of goods sold Total variable expenses 0 0 Contribution margin 1,081,000 1,457,000 Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative expenses 0 0 Net operating income (loss) $1,081,000 $1,457,000

	Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes July August Variable costing net operating income (loss) Add (deduct) fixed manufacturing overhead cost deferred in (released from) inventory under absorption costing Absorption costing net operating income (loss)

Answer 1